As filed with the Securities and Exchange Commission on August 28,October 12, 2001
Registration No. 333-_____333-68550
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No.1 to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
WESTFIELD FINANCIAL, INC.
(exact name of registrant as specified in its charter)
Massachusetts 6035 Application Pending
(state or other jurisdiction of (Primary Standard (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
c/o Westfield Bank
141 Elm Street
Westfield, Massachusetts 01085
(413) 568-1911
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
_________________
Donald A. Williams
President and Chief Executive Officer
Westfield Bank
141 Elm Street
Westfield, Massachusetts 01085
(413) 572-4212
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_________________
Copies to:
Richard A. Schaberg, Esq.
Thacher Proffitt & Wood
1700 Pennsylvania Ave, N.W., Ste. 800
Washington, D.C. 20006
(202) 347-8400
_________________
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [X]
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of each Class of Amount to be Offering Price Per Proposed Maximum Amount of Registration FeeFee(3)
Securities to be Registered Registered(1) Share(2) Aggregate Offering Price(2)
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Common Stock $.01 par Value 4,972,600 $ 10.00 $ 49,726,000 $ 12,432
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(1) Includes the maximum number of shares that may be issued in connection with
this offering.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid
The Registrant hereby amends this Registration on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to Section 8(a), may determine.
WESTFIELD FINANCIAL, INC.
Cross Reference Sheet showing location in the Prospectus of information required
by Items of Form S-1:
Registration Statement Item and Caption Location or Headings in Prospectus
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1. Forepart of the Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk Factors Summary; Risk Factors
4. Use of Proceeds Summary--How We Intend to Use the Proceeds We Raise from the
Offering; How We Intend to Use the Proceeds from the Stock Offering
5. Determination of Offering Price Summary---How We Determined the Offering Range and the $10.00
Price Per Share; The Reorganization and the Stock Offering--How We
Determined the Offering Range and the $10.00 Price Per Share
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Summary--Persons Who May Order Stock in the Stock Offering; The
Reorganization and the Stock Offering--Subscription Offering and
Subscription Rights, Direct Community Offering and Syndicated
Community Offering
9. Description of Securities to be Registered Description of Capital Stock of Westfield Financial, Inc
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant Outside Front Cover Page; Summary--The Companies; Summary--Our
Directors, Officers and Employees Will Have Additional
Compensation and Benefit Programs After the Reorganization and
Stock Offering; Selected Consolidated Financial and Other Data;
Westfield Bank; Westfield Financial, Inc.; Westfield Mutual
Holding Company; Our Policy Regarding Dividends; Market for the
Common Stock; Regulatory Capital Compliance; Capitalization; Pro
Forma Data; Westfield Mutual Holding Company Consolidated
Statements of Income; Management's Discussion and Analysis of
Financial Condition and Results of Operations; Business of
Westfield Bank; Business of Westfield Financial and Business of
Westfield Mutual Holding Company; Regulation of Westfield Bank,
Westfield Financial and Westfield Mutual Holding Company;
Dividends Waivers By Westfield Mutual Holding Company; Taxation;
Management; Executive Officers; The Reorganization and the Stock
Offering; Restrictions on Acquisition of Westfield Financial, Inc.
and Westfield Bank; Description of Capital Stock of Westfield
Financial, Inc.; Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
PROSPECTUS
[LOGO]
WESTFIELD FINANCIAL, INC.
Proposed Holding Company for Westfield Bank
Up to 4,972,600 Shares of Common Stock
Westfield Financial, Inc., a Massachusetts-chartered stock holding company, is
offering for sale up to 4,972,600 shares, or 47% of its common stock. Westfield
Financial will issue the remaining 53% of its shares to Westfield Mutual Holding
Company, a Massachusetts chartered mutual holding company. Westfield Financial
has been organized as the mid-tier stock holding company subsidiary of Westfield
Mutual Holding Company, and will own 100% of the common stock of Westfield Bank,
a Massachusetts-chartered stock savings bank. We have received conditional
approvalapplied to have the common
stock of Westfield Financial listed on the American Stock Exchange under the
symbol "WFD."
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TERMS OF THE OFFERING
Price: $10.00 per share
Minimum Maximum
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Number of shares 3,196,000 4,324,000
Underwriting commissions and expenses $ 458,048 $ 613,707
Net proceeds to Westfield Financial . $ 30,602,000 $ 41,726,000
Net proceeds per share to Westfield Financial $ 9.58 $ 9.65
We may sell up to 4,972,600 shares because of regulatory considerations
or changes in market or economic conditions without the resolicitation of
subscribers.
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This investment involves a degree of risk, including the possible loss of
principal. Please read the Risk Factors beginning on page ___.
These securities are not deposits or savings accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation, the Depositors
Insurance Fund or any other governmental agency.
None of the Securities and Exchange Commission, the Federal Deposit Insurance
Corporation, the Commissioner of Banks of the Commonwealth of Massachusetts nor
any state securities regulator has approved or disapproved these securities or
determined if this prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
We are offering the common stock on a best efforts basis, subject to certain
conditions. The minimum number of shares that you may purchase is 25 shares.
Funds received prior to the completion of the stock offering will be held in an
account at Westfield Bank that will bear interest at its savings passbook rate.
This stock offering is expected to terminate on _________, 2001.
For information on how to subscribe, call the Stock Information Center at (413)
___-____.562-6153.
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Keefe, Bruyette & Woods, INC.
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__________, 2001
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[MAP OF WESTFIELD BANK BRANCH OFFICES]
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Table of Contents
Page
Summary ................................................................................................... 1
Risk Factors .............................................................................................. 11
Forward-Looking Statements ................................................................................ 14
Selected Consolidated Financial And Other Data ............................................................ 15
Westfield Bank ............................................................................................ 17
Westfield Financial, Inc .................................................................................. 17
Westfield Mutual Holding Company .......................................................................... 17
How We Intend To Use The Proceeds From The Stock Offering ................................................. 18
Our Policy Regarding Dividends ............................................................................ 19
Market For The Common Stock ............................................................................... 20
Regulatory Capital Compliance ............................................................................. 21
Capitalization ............................................................................................ 22
Pro Forma Data ............................................................................................ 23
Westfield Mutual Holding Company Consolidated Statements Of Income ........................................ 29
Management's Discussion and Analysis of Financial Condition And Results of Operations ..................... 30
Business of Westfield Bank ................................................................................ 46
Business of Westfield Financial ........................................................................... 70
Business of Westfield Mutual Holding Company .............................................................. 71
Regulation of Westfield Bank, Westfield Financial and Westfield Mutual Holding Company .................... 72
Dividend Waivers by Westfield Mutual Holding Company ...................................................... 8887
Taxation .................................................................................................. 89
Management ................................................................................................ 9190
The Reorganization and the Stock Offering ................................................................. 106104
Restrictions on Transfer of Subscription Rights and Shares of Common Stock ................................ 120118
Restrictions on Acquisition of Westfield Financial and Westfield Bank ..................................... 125123
Description of Capital Stock of Westfield Financial ....................................................... 131128
Legal and Tax Opinions .................................................................................... 132130
Experts ................................................................................................... 132130
Registration Requirements ................................................................................. 133131
Where You Can Find Additional Information ................................................................. 133131
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[THIS PAGE INTENTIONALLY LEFT BLANK]
Summary
To understand the stock offering more, you should read this entire
document carefully, including the consolidated financial statements and the
notes to the consolidated financial statements beginning on page F-1.
Our Reorganization and Stock Offering
Westfield Mutual Holding Company has organized Westfield Financial to
offer up to 4,972,600 shares of Westfield Financial's common stock to the
public. The shares we are offering represent less than half of the outstanding
shares of common stock of Westfield Financial. More than half of the outstanding
shares of the common stock of Westfield Financial will be owned by Westfield
Mutual Holding Company. After the reorganization and stock offering, Westfield
Financial will own 100% of Westfield Bank.
This chart shows our new structure after the reorganization and stock
offering:
[CHART APPEARS HERE]
1
The Companies
Westfield Bank
Westfield Bank is a Massachusetts-chartered stock savings bank that is
currently a wholly-owned subsidiary of Westfield Mutual Holding Company, a
Massachusetts-chartered mutual holding company. Westfield Bank was formed in
1853 and reorganized into a mutual holding company structure without a stock
offering in 1995. Historically, Westfield Bank has been a community-oriented
provider of banking products and services to businesses and individuals,
including traditional products such as residential and commercial real estate
loans, consumer loans and a variety of deposit products. In recent years,
however, in addition toWestfield Bank has developed and implemented a lending strategy that
focuses less on residential real estate lending Westfield Bank has adopted a growth-oriented
strategy focusedand more on servicing commercial
customers, including increased emphasis on commercial and industrial and
consumer lending and deposit relationships, extending its branch network and
broadening its product lines and services. Westfield Bank believes that this
business strategy is best for its long term success and viability, and
complements its existing commitment to high quality customer service. Westfield
Bank operates through 10 banking offices in Agawam, East Longmeadow, Holyoke,
Southwick, Springfield, West Springfield and Westfield, Massachusetts. It also
has two free-standing ATM locations in Agawam and Feeding Hills, Massachusetts.
Westfield Bank's primary deposit gathering area is concentrated in the
communities surrounding these locations and its primary lending area includes
all of Hampden County in western Massachusetts. In addition, Westfield Bank
provides online banking services through its web site
(http://www.westfieldbank.com).
In addition, beginning on September 1, 2001, Westfield Bank will refer
its residential real estate loan customers to a third party mortgage company.
Under the program, substantially all of Westfield Bank's residential real estate
loans will be underwritten and originated by the third party mortgage company.
In connection with this referral program, Westfield Bank receives fee income for
each of the loans originated by the third party mortgage company. Westfield Bank
may purchase residential real estate loans from the third party mortgage company
depending on market conditions.
Westfield Financial, Inc.
We will be the stock holding company for Westfield Bank after the
reorganization and stock offering. We have not engaged in any business to date.
Westfield Mutual Holding Company
Westfield Mutual Holding Company is a Massachusetts-chartered mutual
holding company formed in 1995 in connection with Westfield Bank's
reorganization into the mutual holding company form. Westfield Mutual Holding
Company is governed by its Board of Corporators and its Board of Trustees. On a
consolidated basis at June 30, 2001, Westfield Mutual Holding Company had total
assets of $705.4 million and total equity of $80.9 million.
The following are highlights of Westfield Bank's operating strategy:
o Community Banking and Customer Service.
Westfield Bank strives to remain a leader in meeting the financial
service needs of the local community and to provide quality service to the
businesses and individuals in its market area. Historically, Westfield Bank has
been a community-oriented provider of traditional
2
banking products and services to business organizations and individuals,
including products such as residential and commercial mortgages, consumer loans,
and a variety of deposit products. In recent years, Westfield Bank has increased
its focus on commercial and consumer loans and complementary deposit products.
o Increased Emphasis on Commercial and Consumer Lending.
Westfield Bank offers commercial business loan and deposit products
primarily within Hampden County, Massachusetts. As of June 30, 2001, 11.46% of
Westfield Bank's loan portfolio consisted of commercial and industrial loans.
These types of loans generally have higher yields than residential mortgages,
but expose Westfield Bank to greater credit risk than loans secured by
residential real estate because repayment is dependent on income being generated
in amounts sufficient to cover operating and debt service and on the successful
operation of the borrower's business. As of June 30, 2001, Westfield Bank's
commercial and industrial loans have grown $30.4 million, or 166.8%, since
December 31, 1996 and $16.0 million, or 49.0%, since December 31, 1999. During
these periods, commercial checking accounts increased $13.2 and $5.6 million or
108.9% and 28.6%, respectively. Following the reorganization, Westfield Bank
will continue to expand its commercial loans and deposits by targeting
commercial businesses in its market area.
Westfield Bank also offers a wide variety of consumer loan products,
including automobile loans. As of June 30, 2001, Westfield Bank had $67.0
million of consumer loans, representing 15.8% of its portfolio. Of this amount,
$60.7 million, or 14.3% of total loans, were indirect auto loans.
Management believes that the increased emphasis on commercial and
consumer lending will allow Westfield Bank to increase the yield on and
diversify its loan portfolio while continuing to meet the needs of the
businesses and individuals that it serves.
o Branch Expansion.
Westfield Bank believes that a well-positioned branch network is
critical to maintaining market share in the community banking and business
arenas. It plans to engage in opportunistic branch expansion, either de novo or
through acquisition, to enhance its presence in areas where its lending and
deposit opportunities are greatest. As part of this strategy, Westfield Bank has
opened four new branches since 1997, including two in 2001.
o Asset Quality.
Westfield Bank has a commitment to conservative loan underwriting
policies and investing in high grade assets. As a result of these practices, at
June 30, 2001, Westfield Bank had $2.3 million in nonperforming loans, and its
ratio of nonperforming loans to total assets was 0.33%. On that same date, its
ratio of allowance for loan losses to total loans was 0.84%.
o Capital Strength.
Our policy has always been to maintain the financial strength of
Westfield Bank through risk management, a sound financial condition and
consistent earnings. At June 30, 2001, our
3
ratio of equity to assets was 11.46%, our return on average assets was 0.67% and
our return on average equity was 5.92%.
Reasons for the Reorganization and Stock Offering
The reorganization and stock offering is intended to provide an
additional source of capital not currently available to us. Funds raised in the
stock offering will allow Westfield Bank to serve better the needs of the local
community through:
o increasing lending to support continued growth in its
commercial loan portfolio;
o opening or acquiring additional branch offices;
o financing acquisitions of other financial institutions or
other businesses related to banking;banking, although no mergers or
acquisitions are planned at the present time; and
o expanding the financial products and services it currently
offers.
The reorganization and stock offering is also intended to provide an
additional source of capital to Westfield Financial in order to allow us to:
o finance acquisitions of other financial institutions or other
businesses related to banking;banking, although no mergers or
acquisitions are planned at the present time;
o pay dividends to stockholders;
o repurchase shares of our common stock; and
o use proceeds for other general corporate purposes.
Additionally, after the reorganization and stock offering, we will have
the ability to issue additional shares of common stock to raise capital or to
support mergers or acquisitions, although no additional capital issuance and no
mergers or acquisitions are planned or contemplated at the present time. In
addition, stock ownership by officers and other employees, through stock-based
benefit plans, has proven to be an effective performance incentive and an
effective means of attracting and retaining qualified personnel. We also believe
that the reorganization and stock offering will provide local customers and
other residents with an opportunity to become equity owners of Westfield
Financial, and thereby participate in possible stock price appreciation and cash
dividends.
After considering the advantages and risks of the reorganization and
stock offering, as well as applicable fiduciary duties, the Board of Trustees of
Westfield Mutual Holding Company and the Board of Directors of Westfield Bank
unanimously approved the reorganization and stock offering as being in the best
interests of Westfield Bank and Westfield Mutual Holding Company, and the
depositors and the communities served by Westfield Bank. The Board of Trustees
of Westfield Mutual Holding Company and the Board of Directors of Westfield Bank
believe that Westfield Bank's ability to remain an independent bank and to
provide community-
4
oriented financial services will be preserved by remaining in mutual holding
company form. At a special meeting of the corporators of Westfield Mutual
Holding Company held on October __,30, 2001, the corporators of Westfield Mutual
Holding Company approved the plan of reorganization and stock issuance.
Terms of the Stock Offering
We are offering between 3,196,000 and 4,324,000 shares of common stock
of Westfield Financial to the public. The maximum number of shares that we sell
in the stock offering may increase by 15% to 4,972,600 shares as a result of
regulatory considerations or changes in financial markets. Unless the number of
shares to be issued is increased to more than 4,972,600 or decreased below
3,196,000, you will not have the opportunity to change or cancel your stock
order. The offering price is $10.00 per share. Keefe, Bruyette & Woods, Inc.,
our financial advisor and marketing agent in connection with the reorganization
and stock offering, will use its best efforts to assist us in selling our stock.
Persons Who May Order Stock in the Stock Offering
We are offering the shares of common stock of Westfield Financial in
what we call a "subscription offering" in the order of priority listed below:
(1) Depositors with accounts at Westfield Bank with aggregate
balances of at least $50 on December 31, 1999;
(2) Depositors with accounts at Westfield Bank with aggregate
balances of at least $50 on December 31, 2000; and
(3) The tax-qualified employee plans of Westfield Bank (including
the employee stock ownership plan (ESOP)), which will provide
retirement benefits to our employees.
The shares of common stock not purchased in the subscription offering
will be offered in what we call a "direct community offering," on a priority
basis, with preference to the natural persons residing within Westfield Bank's
Community Reinvestment Act assessment area which consists of the municipalities
of Agawam, Blandford, Chester, East Longmeadow, Granville, Holyoke, Longmeadow,
Montgomery, Russell, Springfield, Southhampton,Southampton, Southwick, Tolland, Westfield
and West Springfield. Shares may also be offered to the general public. We also
may offer shares of common stock not purchased in the subscription offering or
the direct community offering to the public through a syndicate of
broker-dealers managed by Keefe, Bruyette & Woods, Inc. (referred to as a
"syndicated community offering"). We have the right to accept or reject orders
received in the direct community offering and the syndicated community offering
at our sole discretion.
5
How We Determined the Offering Range and the $10.00 Price Per Share
The offering range is based on an independent appraisal of the market
value of the common stock to be offered. RP Financial, LC., an appraisal firm
experienced in appraisals of banks and financial institutions, has estimated as
of August 3, 2001 the market value of the common stock to be between $31,960,000
and $43,240,000. This results in a stock offering of between 3,196,000 and
4,324,000 shares of common stock at an offering price of $10.00 per share. RP
Financial's estimate of our market value was based in part upon our financial
condition and results of operations and the effect of the additional capital
raised in this stock offering. RP Financial's independent appraisal will be
updated before we complete our reorganization and stock offering.
The $10.00 price per share was selected primarily because $10.00 is the
price per share most commonly used in stock offerings involving reorganizations
of banking institutions and mutual holding companies. See "Pro Forma Data."
Limits on Your Purchase of the Common Stock
Your orders for common stock will be limited in the following ways:
(1) the minimum order is 25 shares or $250;
(2) in the subscription offering, the maximum amount that an
individual may purchase is $300,000;
(3) in the direct community offering and in the syndicated
community offering, the maximum amount that an individual may
purchase is $300,000;
(4) in all categories of the stock offering combined, the total
amount that an individual may purchase, acting together with
others, is $500,000; and
(5) if we receive orders for a greater number of shares than we
are offering, then we will allocate the available shares that
we issue. This may result in your receiving a smaller number
of shares than you ordered. See "The Reorganization and the
Stock Offering."
We may increase the purchase limitations at any time. In addition, in
any direct community offering or syndicated community offering, we must first
fill orders for our common stock on a basis that will promote a widespread
distribution of stock. Thereafter, we must allocate any remaining shares on an
equal number of shares per order basis, until we fill all orders. The ESOP is
authorized to purchase up to 8% of the shares sold in the stock offering to
persons other than Westfield Mutual Holding Company without regard to these
purchase limitations. For additional information on these purchase limitations
see "The Reorganization and The Stock Offering - Subscription Offering and
Subscription Rights."
6
How You May Pay for Your Shares
In the subscription offering and the direct community offering you may
pay for your shares only by:
(1) personal check, bank check or money order; or
(2) authorizing us to withdraw money from your non-check writing
deposit accounts maintained with Westfield Bank.
You May Not Sell or Transfer Your Subscription Rights
If you order stock in the subscription offering, you will be required
to state that you are purchasing the stock for yourself and that you have no
agreement or understanding to sell or transfer your subscription rights. We
intend to take legal action, including reporting persons to federal or state
regulatory agencies, against anyone who we believe sells or gives away their
subscription rights. We will not accept your order if we have reason to believe
that you sold or transferred your subscription rights.
Deadline for Orders of Common Stock
If you wish to purchase shares, a properly completed stock order form,
together with payment for the shares, must be received by the Stock Information
Center at our main office or any of Westfield Bank's branch offices no later
than 12:00 noon, Massachusetts time, on ________, 2001, unless we extend this
deadline. You must submit your order forms by mail, overnight courier or by
dropping off your order at the Stock Information Center at our main office or at
any of Westfield Bank's branch offices.
Termination of the Stock Offering
The subscription offering will terminate at 12:00 noon, Massachusetts
time, on ______, 2001. We expect that the community offering will terminate at
the same time. We may extend this expiration date without notice to you, until
______, 2001, unless regulators approve a later date. If the subscription
offering and/or community offering is extended beyond ______, 2002, we will be
required to resolicit subscriptions before proceeding with the stock offering.
All further extensions, in the aggregate, may not last beyond ________, 2003.
Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares
If we do not receive orders for at least 3,196,000 shares of common
stock, we may take several steps in order to sell the minimum number of shares
in the offering range. Specifically, we may increase the $300,000 and $500,000
purchase limitations to a maximum of $2,162,000, which is 5% of the maximum of
the offering range. In addition, we may seek regulatory
7
approval to extend the stock offering beyond the _______, 2002 expiration date,
provided that any such extension will require us to resolicit subscriptions
received in the stock offering. See "Restrictions on Transfer of Subscription
Rights and Shares of Common Stock - Limitations on Common Stock Purchases."
Market for the Common Stock
We have received conditional approvalapplied to have the common stock of Westfield Financial listed
on the American Stock Exchange under the symbol "WFD." See "Market for Common
Stock."
How We Intend to Use the Proceeds We Raise from the Stock Offering
Assuming we sell 4,324,000 shares in the stock offering, we intend to
distribute the net proceeds from the stock offering as follows:
o $20,863,000 will be contributed to Westfield Bank;
o $3,459,200 will be loaned to the ESOP Trust to fund its
purchase of common stock; and
o $17,403,800 will be retained by Westfield Financial.
Westfield Financial intends to use the net proceeds retained from the
stock offering to finance acquisitions of financial institutions or other
businesses related to banking (although no mergers or acquisitions are planned
at the present time), to pay dividends, to repurchase common stock or for other
general corporate purposes.
Westfield Bank may use the proceeds it receives to increase its lending
activities, especially to support the growth of its commercial and industrial
loan portfolio; for opportunistic branch expansion, either de novo or through
acquisition; to acquire other financial institutions or other businesses related
to banking;banking (although no mergers or acquisitions are planned at the present
time); and to expand the products and services it currently offers. Initially,
both Westfield Bank and Westfield Financial intend to invest the net proceeds
from the stock offering in short-term investments and mortgage-backed securities
until these proceeds can be deployed for the purposes discussed above.
Our Policy Regarding Dividends
We currently plan to pay a quarterly cash dividend with an annualized
rate of $0.20 per share, starting one quarter after the completion of our
reorganization and stock offering. Based on our earnings history and the
proceeds from the stock offering, we believe we will have the financial ability
to pay this dividend. Future dividends are not guaranteed and will depend on our
ability to pay them.
The only funds available to us for the payment of dividends will be
cash and cash equivalents held at the holding company level, dividends paid by
Westfield Bank to us and
8
borrowings. Westfield Bank will be prohibited from paying cash dividends to us
to the extent that any such payment would reduce Westfield Bank's capital below
required capital levels or would impair the liquidation account to be
established for the benefit of Westfield Bank's eligible account holders and
supplemental eligible account holders at the time of the reorganization. See
"Regulation of Westfield Bank, Westfield Financial and Westfield Mutual Holding
Company -- Massachusetts Banking Regulation -- Dividends."
Our Directors, Officers and Employees Will Have Additional Compensation and
Benefit Programs After the Reorganization and Stock Offering
In order to tie the interests of our trustees and directors, officers
and employees closer to the interests of our stockholders, we intend to
establish certain benefit plans that use our stock as compensation. Accordingly,
we are adding new benefit plans for our officers and employees at no cost to
them, including the ESOP and a benefit restoration plan. We also plan to adopt a
stock option plan and management recognition plan after the reorganization and
to enter into employment agreements with Donald A. Williams, our President and
Chief Executive Officer, Michael J. Janosco, Jr., our Chief Financial Officer
and Treasurer, and Victor J. Carra, our Executive Vice President. We will also
enter into change in control agreements with three of our other executive
officers. These new benefit plans and employment agreements will increase our
future costs of compensating our trustees and directors, officers and employees,
thereby reducing our earnings. Additionally, stockholders will experience a
reduction in ownership interest if newly issued shares are used to fund stock
options and the management recognition plan. See "Risk Factors- The
implementation of stock-based benefits will increase our future compensation
expense, reduce our earnings and cause dilution" and "Management- Employment
Agreements, -Change of Control Agreements, -Benefit Plans and -Future Stock
Benefit Plans."
Possible Conversion of Westfield Mutual Holding Company to Stock Form
In the future, Westfield Mutual Holding Company will have the ability
to convert from the mutual to capital stock form, in a transaction commonly
known as a "second-step conversion." In a second-step conversion, members of
Westfield Mutual Holding Company would have subscription rights to purchase
shares of the converted Westfield Mutual Holding Company and theCompany. Although stockholders
of Westfield Financial would be entitled to exchange their shares of common
stock for shares of the converted Westfield Mutual Holding Company in a manner
that is fair and reasonable to the shareholders.shareholders only those shareholders who are
members of Westfield Mutual Company on the eligibility dates set by Westfield
Mutual Holding Company in its second step conversion would be entitled to
subscription rights in the offering. The exchange ratio may be adjusted to
reflect the assets owned by Westfield Mutual Holding Company. Westfield
Financial's public stockholders would own approximately the same percentage of
the converted Westfield Mutual Holding Company as they owned prior to the
second-step conversion. The board of trustees has no current plan to undertake a
"second-step conversion" transaction.
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How You May Obtain Additional Information Regarding the Reorganization and Stock
Offering
If you have any questions regarding the stock offering or the
reorganization, please call the Stock Information Center at __________,(413) 562-6153,
Monday through Friday between 9:00 a.m. and 4:00 p.m., Massachusetts time.
10
Risk Factors
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You should consider carefully the following risk factors before deciding whether
to invest in our common stock.
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Consumer, commercial business and commercial real estate lending increase credit
risk because of the higher risk that the loans will not be repaid.
Westfield Bank originates commercial and industrial loans, commercial
real estate loans, consumer loans and residential real estate loans primarily
inside its market area. Consumer, commercial and industrial and commercial real
estate loans generally expose a lender to greater credit risk than loans secured
by residential real estate. These loans have higher risks than loans secured by
residential real estate for the following reasons:
o Commercial and Industrial Loans. Repayment is generally
dependent upon the successful operation of the borrower's
business.
o Commercial Real Estate Loans. Repayment is dependent on income
being generated in amounts sufficient to cover operating
expenses and debt service.
o Consumer Loans. Consumer loans (such as indirect automobile
loans) are collateralized, if at all, with assets that may not
provide an adequate source of payment of the loan due to
depreciation, damage or loss.
A low demand for mortgage,In recent years, Westfield Bank has developed and implemented a lending
strategy that focuses less on residential real estate and more on servicing
commercial customers, including increased emphasis on commercial and consumer
lending. As a result of this strategy, Westfield Bank's credit risk has
increased. Westfield Bank has experienced increases in charge-offs since 1999.
The change in lending strategy increases in charge-offs and the limited
seasoning of the indirect automobile loan portfolio indicate that Westfield Bank
may have greater overall credit risk exposure than other community banks. This
greater overall credit risk may also reflect an increased risk that commercial
and consumer borrowers will default on their loans as the economy slows.
Consumer, commercial business and commercial real estate lending, increase risk
because the collateral securing these loans may not be sold as easily as
residential real estate loans.
Westfield Bank originates commercial and industrial loans, commercial
real estate loans, consumer loans and residential real estate loans primarily
inside its market area. Consumer, commercial and industrial and commercial real
estate loans may expose us to greater credit risk than loans secured by
residential real estate because the collateral securing these loans may not be
sold as easily as residential real estate loans.
Because we have only recently increased our focus on commercial and consumer
loans, may lowerpast performance might not be indicative of our profitability.
Making loans is Westfield Bank's primary business and primary source of
profits. If customer demand for loans decreases, its profits may decrease
because its alternative investments earn less revenue for us than real estate,future results.
Since 1996, we have increased our focus on commercial and consumer
loans. Customer demand for loans could beand reduced by a
weaker economy, an increase in unemployment, a decrease inthe relative amount of residential real estate values,
an increaseloans in interest rates or increased competition from other institutions.our
portfolio. Commercial and industrial loans and consumer loans generally have
higher yields than residential real estate loans, but expose us to greater
credit risk. Because we have only recently emphasized commercial and consumer
loans relative to residential real estate loans, past performance might not be
indicative of our future results.
Because Westfield Bank's loans are concentrated in a small geographical area,
downturns in its local economy may affect its profitability and future growth
possibilities.
Westfield Bank's loan portfolio is secured primarily by residential and
commercial real estate located in Hampden County. Accordingly, the asset quality
of Westfield Bank's loan portfolio depends upon the economy and unemployment
rate in this area. A downturn in the economy or the real estate market in
Westfield Bank's primary lending area would likely adversely affect Westfield
Bank's operations and profitability.
11
After the reorganization, our return on average equity will be low compared to
other companies. This could hurt the price of your common stock.
We will not be able to deploy the increased capital from this stock
offering into high-yielding earning assets immediately. Our ability to leverage
our new capital profitably will be significantly affected by industry
competition for loans and deposits. Initially, we intend to invest the net
proceeds in short-term investments and mortgage-backed securities, which
generally have lower yields than loans. This will reduce our return on average
equity to a level that will be lower than our historical ratios. For the six
months ended June 30, 2001, our annualized return on average equity was 5.92%.
Until we can leverage our increased capital and increase interest earning
assets, we expect our return on equity to be below the industry average, which
may negatively impact the value of your stock.
ChangingStock market volatility may affect the price of your common stock.
Due to the tragedies of September 11 and a weakening economy, publicly
traded stocks have recently experienced substantial market price volatility.
These market fluctuations may be unrelated to the operating performance of
particular companies whose shares are traded. The purchase price of our common
stock in the offering is based on the independent appraisal by RP Financial.
After your shares begin trading, the trading price of your common stock will be
determined by the marketplace, and may be influenced by many factors, including
prevailing interest rates, investor perceptions of us and general industry and
economic conditions. If market volatility continues, it may adversely affect our profits.
To be profitable, we must earn more interest on loans and investments
than the interest we pay on deposits and borrowings. We use both net interest
income simulation and gap analysis to measure Westfield Bank's interest rate
risk. Bothprice of
those models indicate that, if interest rates rise, the interest
we pay on interest-bearing liabilities, such as deposits and borrowings, would
increase more quickly than interest earned on interest-earning assets, such as
loans and investment securities. This would reduce Westfield Bank's net income
in the short-term. In addition, rising interest rates may hurt Westfield Bank's
income because they may reduce the demand for loans and the value of Westfield
Bank's investment securities and make it more difficult for its borrowers to
repay their loans. If interest rates decline, however, Westfield Bank's loans
may be refinanced at lower rates or paid off and its investments may be prepaid
earlier than expected, which may also lower its income. Interest rates will
continue to fluctuate, and we cannot predict future Federal Reserve Board
actions or other factors that will cause rates to change.your common stock.
The implementation of stock-based benefits will increase our future compensation
expense, reduce our earnings, and cause dilution.
We intend to adopt a stock option plan that will provide for granting
to eligible officers, employees, and directors and trustees options to purchase
common stock of up to 10% of the common stock sold in the stock offering, to
adopt a management recognition plan that will provide for awards of common stock
to eligible employees, officers and directors and trustees of up to 4% of the
common stock sold in the stock offering, and an ESOP, which intends to purchase
in the stock offering 8% of the stock sold, for allocation to employees as a
retirement benefit. These plans will increase our future costs of compensating
our officers, employees, and directors and trustees, thereby reducing our
earnings. Additionally, stockholders will experience a reduction in ownership
interest in the event newly issued shares are used to fund stock options and
restricted stock awards.
12
Because Westfield Mutual Holding Company will own a majorityOur articles of Westfield
Financial's common stock, Westfield Mutual Holding Companyorganization and bylaws may prevent transactions you may like.might
favor, including a sale or merger of Westfield Financial.
Provisions of our articles of organization and bylaws and applicable
provisions of Massachusetts and federal law and regulations may delay, inhibit
or prevent an organization or person from gaining control of Westfield Financial
through a tender offer, business combination, proxy contest or some other method
even though some of our stockholders might believe a change in control is
desirable. In addition, only a majority vote of the board of directors of
Westfield Financial may call a special meeting of shareholders. Therefore, as a
shareholder of Westfield Financial, you will not be able to call a special
meeting of shareholders to consider a tender offer, business combination or
other transaction.
Because Westfield Mutual Holding Company will own a majority of Westfield
Financial's common stock, Westfield Mutual Holding Company may prevent
transactions you may like.
Westfield Mutual Holding Company will own at least a majority of
Westfield Financial's common stock after the reorganization and stock offering.
The same directors and officers who manage Westfield Bank will manage Westfield
Financial and Westfield Mutual Holding Company. The board of trustees of
Westfield Mutual Holding Company will control the outcome of most matters put to
a vote of stockholders of Westfield Financial. WeAs a Massachusetts chartered
mutual holding company, the board of Westfield Mutual Holding Company must
ensure that interests of depositors of Westfield Bank are represented and
considered in matters put to a vote of stockholders of Westfield Financial.
Therefore, we cannot assure you that the votes cast by Westfield Mutual Holding
Company will be in your personal best interests as a stockholder.
13
Forward-Looking Statements
This prospectus contains "forward-looking statements" which may be
identified by the use of such words as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates. These factors include, but are not limited to:
o general and local economic conditions;
o changes in interest rates, deposit flows, demand for mortgages
and other loans, real estate values, and competition;
o changes in accounting principles, policies, or guidelines;
o changes in legislation or regulation;
o and other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing,
products and services.
Any or all of our forward-looking statements in this prospectus and in
any other public statements we make may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or unknown risks
and uncertainties. Consequently, no forward-looking statement can be guaranteed.
14
Selected Consolidated Financial and Other Data
The summary information presented below at or for each of the five
years in the period ended December 31, 2000 is derived in part from and should
be read in conjunction with the consolidated financial statements of Westfield
Mutual Holding Company and the notes thereto presented elsewhere in the
prospectus. The information at June 30 and for the six months ended June 30,
2001 and 2000 is derived from unaudited financial data, but in the opinion of
management, reflects all adjustments necessary for a fair presentation of the
results for such periods. All such adjustments are of a normal and recurring
nature. The results for the six month period ended June 30, 2001 are not
necessary indicative of the results of Westfield Mutual Holding Company that may
be expected for the entire year.
At June 30, At December 31,
------------------- --------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
--------- --------- --------- --------- --------- --------- ---------
(In thousands)
Selected Financial Condition Data:
Total assets ......................... $ 705,433 $ 659,399 $ 694,791 $ 638,563 $ 582,551 $ 549,407 $ 499,724
Loans, net(1) ........................ 421,781 466,955 464,531 467,444 415,084 385,136 350,617
Securities available for sale ........ 69,414 68,199 75,709 53,164 51,570 57,932 52,157
Securities held to maturity .......... 30,656 46,591 39,461 44,239 40,719 40,379 29,462
Mortgage backed securities available
for sale .......................... 98,969 49,87129,871 52,580 23,568 20,643 16,658 16,596
Mortgage backed securities held to
maturity .......................... 38,571 8,501 6,806 4,507 6,698 8,669 11,919
Deposits.............................. 612,162 568,346 601,896 551,024 508,313 482,968 439,527
Customer repurchase agreements ....... 4,986 6,268 7,686 3,274 - - -
Federal Home Loan Bank advances ...... - 3,000 - 5,000 - - -
Total equity ......................... 80,854 77,44574,445 77,755 71,245 66,672 60,468 54,640
Allowance for loan losses ............ 3,570 3,422 3,434 3,118 2,632 2,791 3,094
Nonperforming loans .................. 2,328 1,358 2,308 2,751 838 936 1,816939 1,817
For the Six Months For the Years Ended
Ended June 30, December 31,
------------------- --------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
--------- --------- --------- --------- --------- --------- ---------
(In thousands)
Selected Operating Data:
Interest and dividend income ......... $24,277 $22,544 $46,718 $41,850 $40,784 $38,298 $35,207
Interest expense ..................... 13,424 11,455 24,535 21,151 21,288 20,144 18,490
Net interest and dividend income ..... 10,853 11,089 22,183 20,699 19,496 18,154 16,717
Provision for loan losses ............ 600 750 1,089 843 293 200 580
Net interest and dividend income after
provision for loan losses ......... 10,253 10,339 21,094 19,856 19,203 17,954 16,137
Total noninterest income ............. 839 1,324 2,855 1,555 1,203 1,042 1,419
Total noninterest expense ............ 7,498 6,610 14,684 12,986 12,232 10,125 9,794
Income before income taxes ........... 3,594 5,053 9,265 8,425 8,174 8,871 7,762
Income taxes ......................... 1,222 1,747 3,185 2,898 3,062 3,542 3,094
Net income............................ $ 2,372 $ 3,306 $ 6,080 $ 5,527 $ 5,112 $ 5,329 $ 4,668
-
------------------
(1) Loans are shown net of deferred loan fees, allowance for loan losses and
unadvanced loan funds.
15
At or for the
Six Months Ended
June 30, At or for the Years Ended December 31,
------------------ ------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
------ ------ ------ ------ ------ ------ ------
Selected Financial Ratios and
Other Data(1)
Performance Ratios:
Return on average assets ................ 0.67% 1.02% 0.92% 0.91% 0.90% 1.02% 0.96%
Return on average equity ................ 5.92 8.95 8.04 7.94 7.90 9.10 8.50
Average equity to average assets ........ 11.37 11.44 11.45 11.50 11.45 11.08 10.95
Equity to total assets at end of period . 11.46 11.31 11.19 11.16 11.46 11.01 10.93
Average interest rate spread ............ 2.72 3.07 2.95 3.13 3.18 3.00 3.02
Net interest margin(2) .................. 3.28 3.60 3.53 3.62 3.66 3.56 3.55
Average interest earning assets to
average interest bearing liabilities . 113.66 114.48 114.73 113.27 112.09 112.68 107.24
Total noninterest expense to
average assets ...................... 2.13 2.05 2.22 2.15 2.16 1.93 2.02
Efficiency ratio(3) ..................... 58.43 56.34 62.48 59.68 60.30 52.97 53.69
Regulatory Capital Ratios:
Regulatory tier 1 leverage capital ...... 11.21 12.06 11.51 11.11 11.16 11.44 11.24
Tier 1 risk-based capital ............... 17.38 16.29 16.33 16.28 16.88 16.32 16.18
Total risk-based capital ................ 18.23 17.35 17.24 17.32 17.59 17.05 17.06
Asset Quality Ratios:
Nonperforming loans as a percent of
total loans .......................... 0.55 0.22 0.49 0.59 0.20 0.24 0.51
Nonperforming loans as a percent of
total assets ......................... 0.33 0.21 0.33 0.43 0.18 0.35 0.49
Allowance for loan losses as a percent
of total loans ....................... 0.84 0.73 0.73 0.66 0.63 0.72 0.87
Allowance for loan losses as a percent
of nonperforming assets .............. 150 252 149 113 249 163 120
Number of:
Banking offices ......................... 10 8 8 8 7 7 6
Full-time equivalent employees .......... 161 151 151 150 137 163 129
-
----------------------------
(1) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. Ratios for the period at or for the six months ended June 30 are
annualized.
(2) Net interest margin represents net interest and dividend income as a
percentage of average interest earning assets.
(3) The efficiency ratio represents the ratio of operating expenses divided by
the sum of net interest and dividend income and noninterest income less
gain on sale of securities.
16
Westfield Bank
Westfield Bank is a Massachusetts-chartered stock savings bank,
chartered in 1853. Westfield Bank is headquartered in Westfield, Massachusetts,
located approximately 90 miles west of Boston, Massachusetts, 70 miles southeast
of Albany, New York and 30 miles north of Hartford, Connecticut. Westfield
Bank's deposits are insured by the FDIC up to applicable legal limits and by the
Depositors Insurance Fund in excess of such amounts. Westfield Bank is examined
and regulated by the Division of Banks of the Commonwealth of Massachusetts and
the FDIC. Westfield Bank's executive offices are located at 141 Elm Street,
Westfield, Massachusetts 01085 and its telephone number is (413) 568-1911.
Westfield Bank is a community and customer oriented bank providing
traditional deposit products, commercial and industrial loans, commercial
mortgages, consumer loans and residential mortgages. It operates through 10
banking offices located in Agawam, East Longmeadow, Holyoke, Southwick,
Springfield, West Springfield and Westfield, Massachusetts and also has two
free-standing ATM locations in Agawam and Feeding Hills, Massachusetts. In
addition, Westfield Bank provides online banking services through its web site
(http://www.westfieldbank.com).
At June 30, 2001, Westfield Bank had total assets of $705.4 million of
which 60.3% or $425.1 million were loans. Historically, Westfield Bank has
retained substantially all of the loans that it originates. In the future,
Westfield Bank may sell substantially all of the fixed-rate loans that it
originates. Westfield Bank also invests in mortgage-backed and investment
securities, consisting primarily of U.S. government and federal agency
securities and corporate securities. For further information on Westfield Bank
operations and financial condition, see "Business of Westfield Bank."
Westfield Financial, Inc.
Westfield Financial will serve as a Massachusetts-chartered stock
holding company for Westfield Bank following the reorganization and stock
offering. We have not engaged in any business to date. A majority of the
outstanding shares of our common stock will be owned by Westfield Mutual Holding
Company. Our executive offices are located at 141 Elm Street, Westfield,
Massachusetts 01085 and our telephone number is (413) 568-1911.
Westfield Mutual Holding Company
Westfield Mutual Holding Company is a Massachusetts-chartered mutual
holding company, formed in 1995 in connection with Westfield Bank's mutual
holding company reorganization. Westfield Mutual Holding Company was formed to
provide Westfield Bank with a more flexible organizational structure that would
more easily allow Westfield Bank to acquire other financial institutions or
businesses related to banking and would provide a mechanism for raising
additional capital to support Westfield Bank's operations.
Westfield Mutual Holding Company is a qualified Massachusetts securities
corporation which had $81.4 million in total assets as of June 30, 2001. These
assets consist primarily of investment securities. As part of the
reorganization, Westfield Mutual Holding Company will distribute all of its
assets to Westfield Financial. After the reorganization and stock offering, the
principal assets of Westfield Mutual Holding Company will be the common stock of
Westfield Financial it receives in the reorganization. At this time, we expect
that Westfield Mutual Holding Company will not engage in any business activity
other than its investment in a majority of the common stock of Westfield
Financial.
17
Massachusetts laws and regulations require that as long as Westfield
Mutual Holding Company is in existence, it must own a majority of Westfield
Financial's common stock. Massachusetts law and regulations permit Westfield
Mutual Holding Company to convert to the stock form of organization. For
additional information regarding a stock reorganization of Westfield Mutual
Holding Company, see "The Reorganization and the Stock Offering - Possible
Conversion of Westfield Mutual Holding Company to Stock Form."
How We Intend To Use The Proceeds From The Stock Offering
The net proceeds will depend on the total number of shares of common
stock sold in the stock offering, which will in turn depend on RP Financial's
appraisal, regulatory and market considerations, and the expenses incurred in
connection with the stock offering. Although we will not be able to determine
the actual net proceeds from the sale of the common stock until we complete the
stock offering, we estimate that the net proceeds to be between $30.6 million
and $41.7 million, or $48.1 million if the stock offering is increased by 15%.
Westfield Financial intends to distribute the net proceeds from the stock
offering as follows:
Number of Shares Sold
---------------------------------------------------------
Minimum Maximum Super-Maximum
3,196,000 shares 4,324,000 shares 4,972,600 shares
---------------- ---------------- ----------------
(In thousands)
Offering proceeds ................................... $ 31,960 $ 43,240 $ 49,726
Less: offering expenses ............................. 1,358 1,514 1,603
Net offering proceeds ............................... 30,602 41,726 48,123
Less:
Proceeds contributed to Westfield Bank .......... 15,301 20,863 24,064
Proceeds used for loan to ESOP .................. 2,5672,557 3,459 3,978
Proceeds contributed to Westfield Financial ......... 12,734 17,404 20,081
The net proceeds may vary because total expenses relating to the
reorganization and stock offering may be more or less than our estimates. For
example, our expenses would increase if a syndicated community offering is used
to sell shares not purchased in the subscription offering and community
offering. The net proceeds will also vary if the number of shares to be sold in
the stock offering are adjusted to reflect a change in the estimated pro forma
market value of Westfield Financial and Westfield Bank or if our ESOP purchases
shares in the open market at an average cost that is higher or lower than $10.00
per share. Payments for shares made through withdrawals from existing deposit
accounts will not result in the receipt of new funds for investment by Westfield
Bank but will result in a reduction of Westfield Bank's deposits and interest
expense as funds are transferred from interest bearing certificates of deposit
or other deposit accounts.
18
Westfield Financial may use the proceeds it retains from the stock offering:
o to finance the acquisition of, financial institutions or other
businesses related to banking;banking, although no mergers or
acquisitions are planned at the present time;
o to pay dividends to stockholders;
o to repurchase shares of common stock issued in the stock
offering; and
o for general corporate purposes.
Westfield Bank may use the proceeds it receives from the stock offering:
o to increase lending, especially to support the continued
growth in its commercial loan portfolio;
o to establish or acquire new branches;
o to finance the acquisition of financial institutions or other
businesses related to banking;banking, although no mergers or
acquisitions are planned at the present time; and
o for general corporate purposes.
Initially, both Westfield Bank and Westfield Financial intend to invest
the net proceeds from the stock offering in short-term investments and
mortgage-backed securities until these proceeds can be deployed for the purposes
discussed above.
Our ability to repurchase our common stock is subject to regulatory
restrictions for a period of three years.
Our Policy Regarding Dividends
Following completion of the reorganization, the board of directors of
Westfield Financial intends to pay quarterly cash dividends on the common stock,
beginning after the first quarter following completion of the reorganization and
stock offering. We expect that the initial annual dividend rate to be paid on
the common stock will be at an annualized rate of $0.20 per share. The continued
payment of dividends will also depend upon our debt and equity structure,
earnings and financial condition, need for capital in connection with possible
future acquisitions and other factors, including economic conditions, regulatory
restrictions and tax considerations. We cannot guarantee that we will pay
dividends or, if we pay dividends, the amount and frequency of these dividends.
If Westfield Financial pays dividends to its stockholders, it will be
required to pay dividends to Westfield Mutual Holding Company, unless Westfield
Mutual Holding Company elects to waive dividends. We do not currently anticipate
that Westfield Mutual Holding Company will waive dividends paid by Westfield
Financial. Any decision to waive dividends
19
will be subject to regulatory approval. See "Dividend Waivers by Westfield
Mutual Holding Company."
The only funds available for the payment of dividends on the capital
stock of Westfield Financial will be cash and cash equivalents held by Westfield
Financial, dividends paid by Westfield Bank to Westfield Financial, and
borrowings. Westfield Bank will be prohibited from paying cash dividends to
Westfield Financial to the extent that any such payment would reduce Westfield
Bank's capital below required capital levels or would impair the liquidation
account to be established for the benefit of the Westfield Bank's eligible
account holders and supplemental eligible account holders at the time of the
reorganization and stock offering. See "The Reorganization and the Stock
Offering - Effects of the Reorganization - Liquidation Rights."
If Westfield Financial issues preferred stock, the holders of the
preferred stock may have dividend preferences over the holders of common stock.
FDIC regulations limit Westfield Bank's ability to pay dividends under
certain circumstances. For example, Westfield Bank could not pay dividends if it
was not in compliance with applicable regulatory capital requirements. In
addition, Massachusetts law provides that dividends may not be declared,
credited or paid by Westfield Bank so long as there is any impairment of capital
stock. No dividend may be declared on Westfield Bank's common stock for any
period other than for which dividends are declared upon preferred stock, except
as authorized by the Commissioner of Banks of the Commonwealth of Massachusetts
(the "Commissioner"). The approval of the Commissioner is also required for
Westfield Bank to declare a dividend, if the total of all dividends declared by
it in any calendar year shall exceed the total of its net profits for that year
combined with its retained net profits of the preceding two years, less any
required transfer to surplus or a fund for the retirement of any preferred
stock.
Market For The Common Stock
We have not previously issued common stock, so there is currently no
established market for the common stock. We have received conditional approvalapplied to have our common
stock listed on the American Stock Exchange under the symbol "WFD" after
completion of the stock offering.
The development of an active trading market depends on the existence of
willing buyers and sellers, the presence of which is not within our control. The
number of active buyers and sellers of the common stock at any particular time
may be limited. Under such circumstances, you could have difficulty selling your
shares on short notice and, therefore, you should not view the common stock as a
short-term investment. We cannot assure you that an active trading market for
the common stock will develop or that, if it develops, it will continue. Nor can
we assure you that, if you purchase shares, you will be able to sell them at or
above $10.00 per share.
20
Regulatory Capital Compliance
At June 30, 2001, we exceeded all regulatory capital requirements. Set
forth below is a summary of our capital computed under accounting principles
generally accepted in the United States of America ("GAAP") and our compliance
with regulatory capital standards at June 30, 2001, on a historical and pro
forma basis. We have assumed that the indicated number of shares were sold as of
June 30, 2001 and that Westfield Bank received 50% of the net proceeds from the
offering. For purposes of the table below, the amount expected to be loaned to
the ESOP and the cost of the shares expected to be acquired by the management
recognition plan are deducted from pro forma regulatory capital. For a
discussion of the capital requirements applicable to Westfield Bank, see
"Regulation of Westfield Bank, Westfield Financial and Westfield Mutual Holding
Company - Federal Banking Regulation - Capital Requirements."
Pro Forma at June 30, 2001 Based Upon the Sale at $10.00 Per Share
--------------------------------------------------------------------------------------------------
4,972,600 Shares
3,196,000 Shares 3,760,000 Shares 4,324,000 Shares (15% Above
Historical at (Minimum of (Midpoint of (Maximum of Maximum of
June 30, 2001 Range) Range) Range) Range)(1)
------------------ ----------------- ------------------ ------------------ -------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
------ ---------- ------- --------- ------- ------ ------- -------- ------ --------
(Dollars in thousands)
Equity under generally
accepted accounting
principles .............. $80,854 11.46% $92,220 12.82% $94,324 13.07% $96,428 13.31% $98,848$ 98,848 13.59%
======= ===== ======= ===== ======= ===== ======= ===== =============== =====
Tier 1 leverage capital(3) . 79,258 11.21 90,624 12.57 92,728 12.81 94,832 13.06 97,252 13.34
Requirement(4) ............. 28,289 4.00 28,846 4.00 28,948 4.00 29,050 4.00 29,168 4.00
------- ----- ------- ----- ------- ----- ------- ----- --------------- -----
Excess ..................... 50,969 7.21 61,778 8.57 63,780 8.81 65,782 9.06 68,084 9.34
======= ===== ======= ===== ======= ===== ======= ===== =============== =====
Tier 1 risk-based
capital(3)(5) ........... 79,258 11.21 90,624 12.57 92,728 12.81 94,832 13.06 97,252 13.34
Requirement ................ 18,242 4.00 18,601 4.00 18,667 4.00 18,733 4.00 18,808 4.00
------- ----- ------- ----- ------- ----- ------- ----- --------------- -----
Excess ..................... 61,016 7.21 72,023 8.57 74,061 8.81 76,099 9.06 78,444 9.34
======= ===== ======= ===== ======= ===== ======= ===== =============== =====
Total risk-based
capital(3)(4) ........... 83,139 18.23 94,505 20.32 96,609 20.70 98,713 21.08 101,133 21.51
Requirement(4) ............. 36,484 8.00 37,202 8.00 37,334 8.00 37,466 8.00 37,618 8.00
------- ----- ------- ----- ------- ----- ------- ----- --------------- -----
Excess ..................... 46,655 10.23 57,303 12.32 59,275 12.70 61,247 13.08$46,655 10.23% $57,303 12.32% $59,275 12.70% $61,247 13.08% $ 63,516 13.5113.51%
======= ===== ======= ===== ======= ===== ======= ===== =============== =====
-
----------------------
(1) As adjusted to give effect to an increase in the number of shares, which
could occur due to an increase in the estimated price range of up to 15% as
a result of changes in market conditions or general financial and economic
conditions following the commencement of the offering.
(2) Leverage capital levels are shown as a percentage of "average total
assets," and risk-based capital levels are calculated on the basis of a
percentage of "risk-weighted assets," each as defined in the FDIC
regulations.
(3) Pro forma capital levels assume receipt by Westfield Bank of 50% of the net
proceeds from the shares of common stock sold at the minimum, midpoint and
maximum of the offering range. These levels assume funding by Westfield
Financial of the management recognition plan equal to 4% of the common
stock sold in the stock offering, including repayment of a Westfield
Financial loan to the ESOP Trust to enable the plan to purchase 8% of the
common stock sold in the stock offering.
(4) The current leverage capital requirement for savings banks is 3% of total
adjusted assets for savings banks that receive the highest supervisory
ratings for safety and soundness and that are not experiencing or
anticipating significant growth. The current leverage capital ratio
applicable to all other savings banks is 4%.
(5) Assumes net proceeds are invested in assets that carry a 20%
risk-weighting.
21
Capitalization
The following table presents the historical deposits and consolidated
capitalization of Westfield Mutual Holding Company at June 30, 2001, and the pro
forma capitalization of Westfield Financial after giving effect to the
reorganization and stock offering, based upon the sale of the number of shares
shown below and the other assumptions set forth under "Pro Forma Data." A change
in the number of shares to be sold in the stock offering may affect materially
the capitalization.
Pro Forma Based Upon Sale at $10.00 Per Share
---------------------------------------------------------------
3,760,000 4,972,600 Shares
Historical 3,196,000 Shares 4,324,000 Shares (15% Above
as of Shares (Minimum (Midpoint (Maximum Maximum of
June 30, 2001 of Range) of Range) of Range) Range) (1)
------------- --------------- ---------- ---------------- ----------
(In thousands)
Deposits(2) ............................. $ 612,162 $ 612,162 $ 612,162 $ 612,162 $ 612,162
Customer repurchase agreements .......... 4,986 4,986 4,986 4,986 4,986
---------- ---------- ---------- ---------- ----------
Total deposits and customer repurchase
agreements ........................... $ 617,148 $ 617,148 $ 617,148 $ 617,148 $ 617,148
---------- ---------- ---------- ---------- ----------
Stockholders' equity:
Common stock, $0.01 par value,
30,000,000 shares authorized;
shares to be issued as reflected(3). $ - $ 68 $ 80 $ 92 $ 106
Preferred stock, $.01 par value,
5,000,000 shares authorized; no
shares to be issued ................ - - - - -
Additional paid-in capital(3) ........ - 30,634 36,184 41,734 48,11730,534 36,084 41,634 48,017
Retained Earnings (4) ............... 79,163 79,063 79,063 79,063 79,063
Accumulated other comprehensive
income (5) ......................... 1,691 1,691 1,691 1,691 1,691
Less:
Common stock acquired by ESOP(6) ..... - (2,557) (3,008) (3,459) (3,978)
Common stock acquired by management
recognition plan(7) ................ - (1,278) (1,504) (1,730) (1,989)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity .............. $ 80,854 $ 107,621107,521 $ 112,506112,406 $ 117,391117,291 $ 123,010122,910
========== ========== ========== ========== ==========
-
---------------------------
(1) As adjusted to give effect to an increase in the number of shares, which
could occur due to an increase in the offering of up to 15% as a result of
regulatory considerations or changes in market or general financial and
economic conditions following the commencement of the offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the offering. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the issuance of shares sold in the offering at a value of $10.00
per share.share and the issuance of shares to Westfield Mutual Holding Company as
follows: 3,604,000 shares at the minimum of the estimated valuation range,
4,240,000 shares at the midpoint, 4,876,000 shares at the maximum, and
5,607,400 at 15% above the maximum. No effect has been given to the
issuance of additional shares of common stock pursuant to Westfield
Financial's proposed stock option plan intended to be adopted by Westfield
Financial and presented for approval of stockholders at a meeting of the
stockholders to be held at least six months following completion of the
offering.
(4) The retained earnings of Westfield Bank will be substantially restricted
after the offering.
(5) Represents the unrealized gain on securities classified as available-for-
sale, net of related taxes.
(6) Assumes that 8% of the shares sold in the stock offering will be purchased
by the ESOP at an average cost of $10 per share and that the funds used to
acquire such shares will be borrowed from Westfield Financial. The common
stock acquired by the ESOP is reflected as a reduction of stockholders'
equity.
(7) Assumes that, subsequent to the stock offering, an amount equal to 4% of
shares of common stock sold in the stock offering is purchased by a
management recognition plan through open market purchases. The proposed
management recognition plan is intended to be adopted by Westfield
Financial and presented for approval of stockholders at a meeting of
stockholders to be held at least six months following completion of the
stock offering. The common stock purchased by the management recognition
plan is reflected as a reduction of stockholders' equity.
22
Pro Forma Data
We can not determine the actual net proceeds from the sale of the
common stock until the stock offering is completed. However, we estimate that
net proceeds will be between $30.6 million and $41.7 million, or $48.1 million
if the offering range is increased by 15%, based upon the following assumptions:
o we will sell all shares of common stock in the subscription
offering;
o we will pay Keefe, Bruyette & Woods, Inc. fees and expenses of
approximately $614,000 (assuming the sale of 4,324,000 shares
in the stock offering). No fee will be paid with respect to
the shares of common stock purchased by the ESOP, the
management recognition plan and corporators, trustees,
directors, officers and employees of Westfield Mutual Holding
Company or Westfield Bank and their immediate families. See
"Marketing Arrangements" on page ____; and
o total expenses, excluding fees and expenses paid to Keefe,
Bruyette & Woods, Inc., will be approximately $900,000.
We calculated the pro forma consolidated net income and stockholders'
equity of Westfield Financial for the six months ended June 30, 2001 and the
year ended December 31, 2000, as if the common stock had been sold at the
beginning of each year and the net proceeds had been invested at 3.72% for the
six months ended June 30, 2001 and for the year ended December 31, 2000,
respectively.2000. We
chose these yields because they represent the yield on one-year U.S. Government
securities at the corresponding period. In light of changes in interest rates in
recent periods, we believe this rate more accurately reflects pro forma
reinvestment rates than the arithmetic average method which assumes reinvestment
of the net proceeds at a rate equal to the average of yield on interest earning
assets and cost of deposits for these periods. We assumed a tax rate of 37.0%
for both periods. This results in an annualized after-tax yield of 2.34% for the
six months ended June 30, 2001 and for the year ended December 31, 2000.
We calculated historical and pro forma per share amounts by dividing
historical and pro forma amounts of consolidated net income and stockholders'
equity by the indicated number of shares of common stock. We adjusted these
figures to give effect to the shares purchased by the ESOP. We computed per
share amounts for each period as if the common stock was outstanding at the
beginning of the periods, but we did not adjust per share historical
stockholders' equity to reflect the earnings on the estimated net proceeds. As
discussed under "How We Intend to Use the Proceeds from the Stock Offering,"
Westfield Financial intends to infuse Westfield Bank with 50% of the net
proceeds from the stock offering, make a loan to the ESOP to fund the ESOP's
purchase of 8% of the common stock, and retain all of the rest of the proceeds
at the holding company for capital needs that arise in the future.
The tables and footnotes on pages ____ through ____ give effect to the
"restricted stock program" or "management recognition plan", which we expect to
adopt following the reorganization and stock offering and present to
stockholders for approval at an annual or special meeting of stockholders to be
held at least six months following the completion of the
23
reorganization. If the management recognition plan is approved by stockholders,
the management recognition plan will acquire an amount of common stock equal to
4% of the shares of common stock sold in the stock offering, either through open
market purchases or from authorized but unissued shares of common stock. In
preparing the following tables we assumed that stockholder approval has been
obtained and that the shares acquired by the management recognition plan are
purchased in the open market at $10.00 per share.
As discussed under "How We Intend to Use the Proceeds from the Stock
Offering," Westfield Financial intends to infuse Westfield Bank with 50% of the
net proceeds from the stock offering, make a loan to the ESOP Trust, and retain
all of the remaining proceeds at the holding company level for capital needs
that arise in the future.
An increase in the number of shares of common stock outstanding as a
result of an increase in the estimated pro forma market value of the common
stock would decrease both the percentage of outstanding shares owned by a
subscriber and the pro forma net income and stockholders' equity on a per share
basis while increasing pro forma net income and stockholders' equity on an
aggregate basis. A decrease in the number of shares of common stock outstanding
would increase both a subscriber's ownership interest and the pro forma net
income and stockholders' equity on a per share basis while decreasing pro forma
net income and stockholders' equity on an aggregate basis.
The following tables do not give effect to:
o the shares to be reserved for issuance under the stock option
plan, which requires stockholder approval at an annual or
special meeting of stockholders to be held at least six months
following completion of the reorganization and stock offering;
o withdrawals from deposit accounts to purchase common stock in
the stock offering;
o Westfield Financial's results of operations after the
reorganization and stock offering; or
o changes in the market price of the common stock after the
reorganization and stock offering.
The following pro forma information may not represent the financial
effects of the reorganization and stock offering at the date on which the
reorganization actually occurs and you should not use the table as an indicator
of future results of operations. Pro forma stockholders' equity represents the
difference between the stated amount of assets and liabilities of Westfield
Financial computed in accordance with generally accepted accounting principles.
We did not increase or decrease stockholders' equity to reflect the difference
between the carrying value of loans and other assets and market value. Pro forma
stockholders' equity is not intended to represent the fair market value of the
common stock and may be different than amounts that would be available for
distribution to stockholders if we liquidated.
24
At or for the Six Months Ended June 30, 2001
---------------------------------------------------------------
Maximum
Minimum Midpoint Maximum As Adjusted
3,196,000 3,760,000 4,324,000 4,972,600
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share(1)
---------- ---------- --------- ---------
(Dollars in thousands, except per share amounts)
Gross proceeds ............................ $ 31,960 $ 37,600 $ 43,240 $ 49,726
Less expenses ............................. (1,358) (1,436) (1,514) (1,603)
---------- ---------- --------- ---------
Estimated net proceeds .................... 30,602 36,164 41,726 48,123
Less: Common stock purchased by ESOP(2) ... (2,557) (3,008) (3,459) (3,978)
Less: Common stock purchased by MRP(3) .... (1,278) (1,504) (1,730) (1,989)
Estimated net proceeds, as adjusted ....... $ 26,767 $ 31,652 $ 36,537 $ 42,156
=========== =========== ========== ==========
For the 6 months ended June 30, 2001:
-------------------------------------
Consolidated net income:
Historical ............................. $ 2,372 $ 2,372 $ 2,372 $ 2,372
Pro forma income on net proceeds ....... 312 370 427 493
Pro forma ESOP adjustment(2) ........... (54) (63) (73) (84)
Pro forma MRP adjustment(3) ............ (81) (95) (109) (125)
---------- ---------- --------- ---------
Pro forma net income ................... $ 2,549 $ 2,584 $ 2,617 $ 2,656
========== ========== ========= =========
Per share net income:
Historical ............................. $ 0.36 $ 0.31 $ 0.27 $ 0.23
Pro forma income on net proceeds ....... 0.05 0.05 0.05 0.05
Pro forma ESOP adjustment(2)(4) ........ (0.01) (0.01) (0.01) (0.01)
Pro forma MRP adjustment(3) ............ (0.01) (0.01) (0.01) (0.01)
---------- ---------- --------- ---------
Pro forma net income per share ...... $ 0.39 $ 0.34 $ 0.30 $ 0.26
=========== ============ ========== ==========
Offering price as a multiple of pro forma
net annualized income per share ........ 12.82x 14.71x 16.67x 19.23x
At June 30, 2001
----------------
Stockholders' equity:
Historical ................................ $ 80,85480,754 $ 80,85480,754 $ 80,85480,754 $ 80,85480,754
Estimated net proceeds .................... 30,602 36,164 41,726 48,123
Less: Common Stock acquired by ESOP(2) .... (2,557) (3,008) (3,459) (3,978)
Less: Common Stock acquired by MRP(3) ..... (1,278) (1,504) (1,730) (1,989)
---------- ---------- --------- ---------
Pro forma stockholders' equity ...... $ 107,609107,521 $ 112,506112,406 $ 117,391117,291 $ 123,010122,910
=========== =========== ========== ==========
Stockholders' equity per share(5):
Historical ............................. $ 11.8911.88 $ 10.1110.09 $ 8.798.78 $ 7.647.63
Estimated net proceeds ................. 4.50 4.52 4.54 4.55
Less: Common Stock acquired by ESOP(2) . (0.38) (0.38) (0.38) (0.38)
Less: Common stock acquired by MRP(3) .. (0.19) (0.19) (0.19) (0.19)
---------- ---------- --------- ---------
Pro forma stockholders' equity per
share ............................... $ 15.8215.81 $ 14.0614.04 $ 12.7612.75 $ 11.6211.61
========== ========== ========= =========
Offering price as a percentage of pro
forma stockholders' equity per share. 63.21% 71.12% 78.37% 86.06%63.25% 71.23% 78.43% 86.13%
========== ========== ========= =========
25
-
-----------------------
(1) We reserve the right to issue up to a total of 4,972,600 shares at $10.00
per share, or 15% above the maximum of the offering range. Unless otherwise
required by the regulators, subscribers will not be given the right to
modify their subscriptions unless the aggregate purchase price of the
common stock is increased to exceed $49,726,000 (15% above the maximum of
the offering range.)
(2) Assumes 8% of the common stock sold in the offering is purchased by the
ESOP under all circumstances, and that the funds used to purchase such
shares are borrowed from Westfield Financial. The approximate amount
expected to be borrowed by the ESOP is reflected in this table as a
reduction of capital. Although repayment of this debt will be secured
solely by the shares purchased by the ESOP, we expect to make discretionary
contributions to the ESOP in an amount at least equal to the principal and
interest payments on the ESOP debt. Pro forma net income has been adjusted
to give effect to such contributions, based upon a fully amortizing debt
with a thirty-year term. The provisions of "Statement of Position 93-6
Employers' Accounting for Employee Stock Ownership Plan" ("SOP 93-6") have
been applied for shares to be acquired by the ESOP and for purposes of
computing earnings per share.
(3) Assumes 4% of the common stock sold in the stock offering will be purchased
by the management recognition plan. Before the management recognition plan
is implemented, it must be approved by the stockholders. The dollar amount
of the common stock possibly to be purchased by the management recognition
plan is based on $10.00 per share and represents unearned compensation and
is reflected as a reduction of capital. Such amount does not reflect
possible increases or decreases in the price per share after the stock
offering. As we accrue compensation expenses to reflect the vesting of such
shares over 5 years pursuant to the management recognition plan, the charge
against capital will be reduced accordingly. In the event the shares issued
under the management recognition plan consist of newly issued shares of
common stock at the price per share in the stock offering, the per share
financial condition and result of operations of Westfield Financial would
be proportionately reduced and to the extent the interest of existing
stockholders would be diluted by approximately 1.96%. For purposes of the
preceding table, it was assumed that the number of unvested management
recognition plan shares at June 30, 2001 was 127,840, 150,400, 172,960 and
198,904 for the minimum, midpoint, maximum, and 15% above the maximum of
the offering range, respectively.
(4) Westfield Bank intends to record compensation expense related to the ESOP
in accordance with SOP 93-6. As a result, to the extent the value of the
common stock appreciates over time, compensation expense related to the
ESOP will increase. SOP 93-6 also changes the earnings per share
computations for leveraged ESOPs to include as outstanding only shares that
have been committed to be released to participants. For purposes of the
preceding table, it was assumed that the number of ESOP shares were
committed to be released at June 30, 2001 was 8,523, 10,027, 11,531 and
13,260 for the minimum, midpoint, maximum and 15% above the maximum of the
offering range, respectively.
(5) Stockholders' equity per share data is based upon 6,800,000, 8,000,000,
9,200,000 and 10,580,000 shares outstanding representing shares sold in the
stock offering, and shares purchased by the ESOP and management recognition
plan.
26
At or for the Year Ended December 31, 2000
----------------------------------------------------------------
Maximum
Minimum Midpoint Maximum As Adjusted
3,196,000 3,760,000 4,324,000 4,972,600
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share(1)
---------- ---------- --------- ---------
(Dollars in thousands, except per share amounts)
Gross proceeds .............................. $ 31,960 $ 37,600 $ 43,240 $ 49,726
Less expenses ............................... (1,358) (1,436) (1,514) (1,603)
---------- ---------- --------- ---------
Estimated net proceeds ...................... 30,602 36,164 41,726 48,123
Less: Common stock purchased by ESOP(2) ..... (2,557) (3,008) (3,459) (3,978)
Less: Common stock purchased by MRP(3) ...... (1,278) (1,504) (1,730) (1,989)
---------- ---------- --------- ---------
Estimated net proceeds, as adjusted ......... $ 26,767 $ 31,652 $ 36,537 $ 42,156
========== ========== ========= =========
For the 12 months ended December 31, 2000:
------------------------------------------
Consolidated net income:
Historical ............................... $ 6,080 $ 6,080 $ 6,080 $ 6,080
Pro forma income on net proceeds ......... 625 739 854 986
Pro forma ESOP adjustment(2) ............. (107) (126) (145) (167)
Pro forma MRP adjustment(3) .............. (161) (190) (218) (251)
---------- ---------- --------- ---------
Pro forma net income ..................... $ 6,437 $ 6,503 $ 6,571 $ 6,648
========== ========== ========= =========
Per share net income:
Historical ............................... $ 0.93 $ 0.79 $ 0.68 $ 0.60
Pro forma income on net proceeds ......... 0.10 0.10 0.10 0.10
Pro forma ESOP adjustment(2)(4) .......... (0.02) (0.02) (0.02) (0.02)
Pro forma MRP adjustment(3) .............. (0.02) (0.02) (0.02) (0.02)
---------- ---------- --------- ---------
Pro forma net income per share ........ $ 0.99 $ 0.85 $ 0.74 $ 0.66
========== ========== ========= =========
Offering price as a multiple of pro forma
net annualized income per share .......... 10.10x 11.76x 13.51x 15.15x
At December 31, 2000
--------------------
Stockholders' equity:
Historical .................................. $ 77,75577,655 $ 77,75577,655 $ 77,75577,655 $ 77,75577,655
Estimated net proceeds ...................... 30,602 36,164 41,726 48,123
Less: Common Stock acquired by ESOP(2) ...... (2,557) (3,008) (3,459) (3,978)
Less: Common Stock acquired by MRP(3) ....... (1,278) (1,504) (1,730) (1,989)
---------- ---------- --------- ---------
Pro forma stockholders' equity ........ $ 104,522104,422 $ 109,407109,307 $ 114,292114,192 $ 119,911119,811
========== ========== ========= =========
Stockholders' equity per share(5):
Historical ............................... $ 11.4311.42 $ 9.729.71 $ 8.458.44 $ 7.357.34
Estimated net proceeds ................... 4.50 4.52 4.54 4.55
Less: Common Stock acquired by ESOP(2) ... (0.38) (0.38) (0.38) (0.38)
Less: Common stock acquired by MRP(3) .... (0.19) (0.19) (0.19) (0.19)
---------- ---------- --------- ---------
Pro forma stockholders' equity per
share ................................. $ 15.3615.35 $ 13.6713.66 $ 12.4212.41 $ 11.3311.32
========== ========== ========= =========
Offering price as a percentage of pro
forma stockholders' equity per share .. 65.10% 73.15% 80.52% 88.26%65.15% 73.21% 80.58% 88.34%
========== ========== ========= =========
27
-
-----------------------
(1) We reserve the right to issue up to a total of 4,972,600 shares at $10.00
per share, or 15% above the maximum of the offering range. Unless otherwise
required by the regulators, subscribers will not be given the right to
modify their subscriptions unless the aggregate purchase price of the
common stock is increased to exceed $49,726,000 (15% above the maximum of
the offering range.)
(2) Assumes 8% of the common stock sold in the stock offering is purchased by
the ESOP under all circumstances, and that the funds used to purchase such
shares are borrowed from Westfield Financial. The approximate amount
expected to be borrowed by the ESOP is reflected in this table as a
reduction of capital. Although repayment of this debt will be secured
solely by the shares purchased by the ESOP, we expect to make discretionary
contributions to the ESOP in an amount at least equal to the principal and
interest payments on the ESOP debt. Pro forma net income has been adjusted
to give effect to such contributions, based upon a fully amortizing debt
with a thirty-year term. The provisions of SOP 93-6 have been applied for
shares to be acquired by the ESOP and for purposes of computing earnings
per share.
(3) Assumes 4% of the common stock in the stock offering will be purchased by
the management recognition plan. Before the management recognition plan is
implemented, it must be approved by the stockholders. The dollar amount of
the common stock possibly to be purchased by the management recognition
plan is based on $10.00 per share and represents unearned compensation and
is reflected as a reduction of capital. Such amount does not reflect
possible increases or decreases in the price per share after the stock
offering. As we accrue compensation expenses to reflect the vesting of such
shares over 5 years pursuant to the management recognition plan, the charge
against capital will be reduced accordingly. In the event the shares issued
under the management recognition plan consist of newly issued shares of
common stock at the price per share in the stock offering, the per share
financial condition and result of operations of Westfield Financial would
be proportionately reduced and to the extent the interest of existing
stockholders would be diluted by approximately 1.96%. For purposes of the
preceding table, it was assumed that the number of unvested management
recognition plan shares at December 31, 2000 was 127,840, 150,400, 172,960
and 198,904 for the minimum, midpoint, maximum, and 15% above the maximum
of the offering range, respectively.
(4) Westfield Bank intends to record compensation expense related to the ESOP
in accordance with SOP 93-6. As a result, to the extent the value of the
common stock appreciates over time, compensation expense related to the
ESOP will increase. SOP 93-6 also changes the earnings per share
computations for leveraged ESOPs to include as outstanding only shares that
have been committed to be released to participants. For purposes of the
preceding table, it was assumed that the number of ESOP shares were
committed to be released at December 31, 2000 was 17,045, 20,053, 23,061
and 26,521 for the minimum, midpoint, maximum and 15% above the maximum of
the offering range, respectively.
(5) Stockholders' equity per share data is based upon 6,800,000, 8,000,000,
9,200,000 and 10,580,000 shares outstanding representing shares sold in the
stock offering, and shares purchased by the ESOP and management recognition
plan.
28
Westfield Mutual Holding Company
Consolidated Statements of Income
The Consolidated Statements of Income of Westfield Mutual Holding
Company for the years ended December 31, 2000, 1999, and 1998 have been audited
by Deloitte & Touche LLP, independent auditors and are included in this
prospectus, along with their Auditors' Report on page F-1. The consolidated
statements of income for the years ended December 31, 2000, 1999 and 1998 have
been extracted from the audited consolidated statements of income and should be
read in conjunction with the Consolidated Financial Statements and accompanying
Notes to Consolidated Financial Statements in this prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 30 of this prospectus. The consolidated statements of income
for the six-month periods ended June 30, 2001 and 2000 are unaudited, but in the
opinion of management, reflect all adjustments necessary for a fair presentation
of the results for such periods. The results for the six-month period ended June
30, 2001 are not necessarily indicative of the results of Westfield Mutual
Holding Company for the entire year.
For the Six Months For the Years Ended
Ended June, December 31,
------------------------ --------------------------------------
2001 2000 2000 1999 1998
--------- --------- --------- --------- ---------
(unaudited) (In thousands)
INTEREST AND DIVIDEND INCOME
Residential and commercial real estate
loans ................................. $ 13,207 $ 13,065 $ 26,523 $ 25,891 $ 26,861
Securities and mortgage backed securities. 5,611 4,072 9,216 6,909 6,930
Consumer loans ........................... 2,920 3,226 6,306 5,493 3,162
Commercial and industrial loans .......... 1,732 1,549 3,255 2,520 2,320
Federal funds sold ....................... 288 331 663 361 648
Dividends on stocks ...................... 201 169 386 289 608
Interest-bearing deposits ................ 318 132 369 387 255
--------- --------- --------- --------- ---------
Total interest and dividend income ..... 24,277 22,544 46,718 41,850 40,784
--------- --------- --------- --------- ---------
INTEREST EXPENSE
Deposits ................................. 13,273 11,212 24,087 21,060 21,288
Customer repurchase agreements ........... 151 132 320 41 -
Borrowed funds ........................... - 111 128 50 -
--------- --------- --------- --------- ---------
Total interest expense ................. 13,424 11,455 24,535 21,151 21,288
--------- --------- --------- --------- ---------
Net interest and dividend income ....... 10,853 11,089 22,183 20,699 19,496
PROVISION FOR LOAN LOSSES .................... 600 750 1,089 843 293
--------- --------- --------- --------- ---------
Net interest and dividend income after
provision for
loan losses ........................... 10,253 10,339 21,094 19,856 19,203
--------- --------- --------- --------- ---------
NONINTEREST INCOME:
Service charges and fees ................. 669 644 1,320 1,040 934
Gains on securities, net ................. 170 680 1,535 515 269
--------- --------- --------- --------- ---------
Total noninterest income .............. 839 1,324 2,855 1,555 1,203
--------- --------- --------- --------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits ......... 3,772 3,443 7,871 6,994 6,476
Occupancy expense ...................... 811 709 1,422 1,198 1,481
Computer operations .................... 751 601 1,185 988 801
Stationery, supplies and postage ....... 305 240 502 628 552
Other noninterest expense .............. 1,859 1,617 3,704 3,178 2,922
--------- --------- --------- --------- ---------
Total noninterest expense ............. 7,498 6,610 14,684 12,986 12,232
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES ............... 3,594 5,053 9,265 8,425 8,174
INCOME TAXES ............................. 1,222 1,747 3,185 2,898 3,062
--------- --------- --------- --------- ---------
NET INCOME ............................... $ 2,372 $ 3,306 $ 6,080 $ 5,527 $ 5,112
========= ========= ========= ========= =========
29
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
This discussion and analysis reflects Westfield Mutual Holding Company's
financial statements and other relevant statistical data and is intended to
enhance your understanding of our financial condition and results of operations.
You should read the information in this section in conjunction with Westfield
Mutual Holding Company's Consolidated Financial Statements and accompanying
Notes to Consolidated Financial Statements beginning on page F-1 of this
prospectus, and the other statistical data provided in this prospectus. Unless
otherwise indicated, the financial information presented in this section
reflects the financial condition and operations of Westfield Mutual Holding
Company.
-
--------------------------------------------------------------------------------
General
Westfield Mutual Holding Company's results of operations is comprised
of earnings on investments and the net income recorded by its principal
operating subsidiary, Westfield Bank. Westfield Bank's results of operations
depend primarily on net interest income. Net interest and dividend income is the
difference between the interest income earned on interest-earning assets and the
interest paid on interest-bearing liabilities. Interest-earning assets consist
primarily of residential mortgage loans, commercial mortgage loans, commercial
loans, consumer loans, mortgage-backed securities and investment securities.
Interest-bearing liabilities consist primarily of certificates of deposit,
savings and money market and NOW account deposits, and borrowings from the
Federal Home Loan Bank of Boston. The results of operations also depend on
provision for loan losses, noninterest income, and noninterest expense.
Noninterest expense includes salaries and employee benefits, occupancy expenses
and other general and administrative expenses. Noninterest income includes
service fees and charges.
The results of operations may also be affected significantly by
economic and competitive conditions in the market area and elsewhere, including
those conditions that influence market interest rates, government policies and
the actions of regulatory authorities. Future changes in applicable laws,
regulations or government policies may materially affect the results of
operations. Furthermore, because Westfield Bank's lending activity is
concentrated in loans secured by residential and commercial real estate located
in Hampden County, Massachusetts, downturns in this regional economy could have
a negative impact on its earnings.
Management Strategy
Westfield Bank strives to remain a leader in meeting the financial
service needs of the local community and to provide quality service to the
individuals and businesses in the market areas that it has served since 1853.
Historically, Westfield Bank has been a community-oriented provider of
traditional banking products and services to business organizations and
individuals, including products such as residential and commercial real estate
loans, consumer loans and a variety of deposit products.
30
In recent years, in addition to real estate lending, we have adopted a
growth-oriented strategy that has focused on increased emphasis on commercial
and consumer lending and deposit relationships, extending our branch network and
broadening our product lines and services. We believe that this business
strategy is best for our long term success and viability, and complements our
existing commitment to high quality customer service. In connection with our
overall growth strategy, Westfield Bank seeks to:
o increase lending to support the continued growth of its
commercial loan portfolio as a means to increase the yield on
and diversify its loan portfolio and build transactional
deposit account relationships;
o continue to focus on consumer lending, including indirect
automobile lending, as a means of diversifying its loan
portfolio;
o continue to focus on expanding its retail banking franchise,
and increasing the number of households served within its
market area;
o depending on market conditions, sell substantially all of the
fixed-rate residential real estate loans that it originates
and invest the proceeds of these sales in commercial and
industrial loans, consumer loans, commercial real estate loans
and investment securities in order to diversify its loan
portfolio and reduce interest rate risk;
o maintain its capital strength and asset quality; and
o meet the needs of its local community through a
community-based and service-orientated approach to banking.
Following the reorganization and stock offering, Westfield Bank intends
to utilize proceeds from the stock offering to further the objectives of its
growth-oriented strategy. Westfield Bank may also use the offering proceeds to
acquire branches from other banks or to make other acquisitions. See "How We
Intend to Use the Proceeds from the Stock Offering."
31
Average Balance Sheet and Analysis of Net Interest and Dividend Income
The following tables set forth information relating to our financial
condition and net interest and dividend income at June 30, 2001 and for the six
months ended June 30, 2001 and 2000 and for the years ended December 31, 2000,
1999 and 1998, and reflect the average yield on assets and average cost of
liabilities for the periods indicated. The yields and costs were derived by
dividing income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods shown. Average
balances were derived from actual daily balances over the periods indicated.
Interest income includes fees earned from making changes in loan rates or terms,
and fees earned when commercial real estate loans were prepaid or refinanced.
At June 30, For the Six Months Ended June 30,
--------------------- -------------------------------------------------------------------
2001 2001 2000
--------------------- --------------------------------- -------------------------------
Average Average Average
Actual Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
-------- ------- ------- --------- ------- --------- -------- -------
Assets: (Dollars in thousands)
Interest earning assets:
Short term investments(1) ........ $ 5 3.94% $10,730 $ 288 5.36% $ 10,835 $ 331 6.10%
Securities ....................... 241,244 6.66 189,806 6,130 6.46 140,001 4,373 6.25
Loans(2) ......................... 421,781 7.48 460,465 17,859 7.76 464,463464,473 17,840 7.68
------- ------- ------ ------- ------
Total interest-earning assets .... 663,030 7.18 661,001 24,277 7.34 615,299615,309 22,544 7.33
Total noninterest-earning assets . 42,403 43,533 ------ 29,92029,910 ------
------- ------- -------
Total assets ..................... $705,433 $704,534 $ 645,219
======== ======== =========
Liabilities and Equity:
Interest bearing liabilities:
NOW accounts ..................... 37,097 2.41 34,149 392 2.30 35,076 411 2.34
Regular savings accounts ......... 42,797 1.05 44,290 234 1.06 50,592 271 1.07
Money market deposit accounts .... 121,957 3.17 116,998 1,984 3.40 109,442 1,807 3.30
Time certificates of deposit ..... 364,712 5.33 379,146 10,663 5.62 333,498 8,722 5.23
------- ------- ------ ------- ------
Total interest-bearing
deposits ..................... 566,563 4.35 574,583 13,273 4.62 528,608 11,211 4.24
Customer repurchase agreements ... 4,986 3.74 6,983 151 4.32 8,856 244 5.49
------- ------- ------ ------- ------
Total interest-bearing
liabilities .................. 571,549 4.35 581,566 13,424 4.62 537,464 11,455 4.26
------ ------
Noninterest-bearing deposits ..... 45,599 36,607 29,236
Other noninterest-bearing
liabilities ................... 7,431 6,264 4,680
------- ------- -------
Total noninterest-bearing
liabilities ................... 53,030 42,871 33,916
------- ------- -------
Total liabilities ................ 624,579 624,437 571,380
Total equity ..................... 80,854 80,097 73,839
------- ------- -------
Total liabilities and equity ..... $705,433 $704,534 $ 645,219
======== ======== =========
Net interest and dividend income . $ 10,853 $ 11,089
========= ========
Net interest rate spread(3) ...... 2.83 2.72 3.07
Net interest margin(4) ........... 3.28% 3.60%
Ratio of average
interest-earning assets to
average interest-bearing
liabilities ................... 112.32x116.00x 113.66x 114.48x
(footnotes on following page)
32
For the Year Ended December 31,
----------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ------------------------------ ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
--------- -------- ------ --------- -------- ------- --------- --------- -------
(Dollars in thousands)
Assets:
Interest earning assets:
Short term investments(1) ........ $ 10,570 $ 663 6.28% $ 7,370 $ 361 4.90% $ 10,485 $ 648 5.80%
Investment securities ............ 154,245 9,971 6.47 122,709 7,585 6.18 119,134 7,793 6.58
Loans(2) ......................... 464,011 36,084 7.77 441,901443,901 33,904 7.67 402,774 32,343 8.03
--------- -------- ---- --------- ------- ---- --------- ------- ----
Total interest-earning assets .. 628,826 46,718 7.43 571,980573,980 41,850 7.32 532,393 40,784 7.66
Total noninterest-earning -------- ------- -------
assets ...................... 31,345 32,77030,770 32,862
--------- --------- ---------
Total assets ................... $ 660,171 $ 604,750 $ 565,255
========= ========= =========
Liabilities and Equity:
Interest bearing liabilities:
NOW accounts ..................... 35,071 837 2.38 31,887 748 2.35 28,551 552 1.93
Regular savings accounts ......... 48,835 509 1.04 53,520 1,101 2.06 51,193 1,244 2.43
Money market deposit accounts .... 110,051 3,834 3.48 117,331 3,852 3.28 123,985 4,751 3.83
Time certificates of deposit
accounts ...................... 346,027 18,907 5.46 300,341 15,359 5.11 271,248 14,741 5.43
--------- -------- ---- --------- ------- ---- --------- ------- ----
Total interest-bearing deposits .. 539,984 24,087 4.46 503,079 21,060 4.19 474,977 21,288 4.48
Customer repurchase agreements ... 8,096 448 5.53 1,875 91 4.80 -13 - -
--------- -------- ---- --------- ------- ---- --------- ------- ----
Total interest-bearing
liabilities ................... 548,080 24,535 4.48 504,954 21,151 4.19 474,970474,990 21,288 4.48
-------- ------- -------
Noninterest-bearing deposits ..... 31,826 25,504 20,707
Other noninterest-bearing
liabilities ................... 4,662 4,728 4,8734,860
--------- --------- ---------
Total noninterest-bearing
liabilities ................... 36,488 30,232 25,580
--------- --------- ---------
Total liabilities .............. 584,568 535,186 500,557
Total equity ................... 75,603 69,564 64,698
--------- --------- ---------
Total liabilities and equity ... $ 660,171 $ 604,750 $ 565,255
========= ========= =========
Net interest and dividend income . $ 22,183 $20,699 $19,496
======== ======= =======
Net interest rate spread(3) ...... 2.95 3.13 3.18
Net interest margin(4) ........... 3.53% 3.62% 3.66%
Ratio of average interest-earning
assets to average interest-
bearing liabilities ........... 114.73x 113.27x 112.09x
-
-------------------------
(1) Short term investments include federal funds sold.
(2) Loans are net of deferred loan origination costs (fees), allowance for loan
losses and unadvanced funds.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest earning assets and the weighted average cost of
interest bearing liabilities.
(4) Net interest margin represents net interest and dividend income as a
percentage of average interest earning assets.
33
Rate/Volume Analysis. The following table shows how changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest and dividend income and interest expense
during the periods indicated. Information is provided in each category with
respect to:
(1) interest income changes attributable to changes in volume
(changes in volume multiplied by prior rate);
(2) interest income changes attributable to changes in rate
(changes in rate multiplied by prior volume); and
(3) the net change.
The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
34
Six Months Ended
June 30, 2001 Compared to Year Ended December 31, 2000 Year Ended December 31, 1999
Six Months Ended Compared to Year Ended Compared to Year Ended
June 30, 2000 December 31, 1999 December 31, 1998
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
----------------------------- ----------------------------- ------------------------------
Due to Due to Due to
------------------- ------------------- ------------------
Volume Rate Net Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest earning assets:
Short term investments ....... $ (3) $ (40) $ (43) $ 200 $ 102 $ 302 $ (152) $ (95) $ (287)
Investment securities ........ 1,609 147 1,757 2,040 346 2,386 221 (470) (208)
Loans ........................ (155) 175 19 1,715 465 2,180 3,001 (1,444) 1,561
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning
assets .................... $ 1,451 $ 282 $ 1,733 $ 3,955 $ 913 $ 4,868 $ 3,070 $(2,009) $ 1,066
======= ======= ======= ======= ======= ======= ======= ======= =======
Interest bearing liabilities:
NOW accounts ................. $ (11) $ (8) $ (19) $ 76 $ 12 $ 89 $ 78 $ 118 $ 196
Savings accounts ............. (33) (4) (37) (49) (543) (592) 47 (190) (143)
Money market deposit accounts. 128 49 177 (253) 235 (18) (218) (681) (899)
Time certificates of deposit . 1,281 660 1,941 2,494 1,054 3,548 1,486 (868) 618
Customer repurchase
agreements ................ (41) (51) (92) 344 13 357 91 - 91
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest bearing
liabilities ............... 1,324 646 1,969 2,612 772 3,384 1,484 (1,621) (137)
------- ------- ------- ------- ------- ------- ------- ------- -------
Change in net interest and
dividend income ........... $ 127 $ (364) $ (236) $ 1,346 $ 141 $ 1,484 $ 1,586 $ (388) $ 1,203
======= ======= ======= ======= ======= ======= ======= ======= =======
35
Comparison of Financial Condition at June 30, 2001 and December 31, 2000
The consolidated total assets increased $10.6 million, or 1.5%, to
$705.4 million at June 30, 2001 from $694.8 million at December 31, 2000. On
June 28, 2001, Westfield Bank securitized $35.7 million in thirty-year fixed
rate residential mortgage loans and $24.6 million in fifteen year fixed rate
residential mortgage loans with Fannie Mae. This transaction was done to reduce
interest rate risk as well as improve liquidity and enhance the subsequent
saleability of the resulting securities. Because the dollar value of the
securitized loans equaled the value of the underlying loans, the securitization
did not result in a material change in total assets. Commercial and industrial
loans increased $11.2 million, or 29.8% for the six months ended June 30, 2001.
Deposits increased $10.3 million to $612.2 million at June 30, 2001
compared with $601.9 million at December 31, 2000. Interest-bearing deposits
accounted for $3.2 million of the growth in total deposits, while demand
deposits accounted for $7.1 million.
Customer repurchase agreements decreased $2.7 million or 35.1% to $5.0
million at June 30, 2001 from $7.7 million at December 31, 2000. A "customer
repurchase agreement" is an agreement by Westfield Bank to sell to and
repurchase from the customer an interest in specific securities issued by or
guaranteed by the United States Government. This transaction settles
immediately on a same day basis in immediately available funds. Interest paid is
commensurate with other products of equal interest and credit risk.
Total equity increased $3.1 million, or 3.99%, to $80.9 million at June
30, 2001 from $77.8 million at December 31, 2000. This was primarily the result
of the net income of $2.4 million and an increase in unrealized gains on
investment securities available for sale of $727,000 for the six months ended
June 30, 2001.
Comparison of Operating Results for the Six Months Ended June 30, 2001 and June
30, 2000.
General
Net income was $2.4 million for six months ended June 30, 2001, a
decrease of $934,000, or 28.3%, compared with net income of $3.3 million for the
2000 period. The decrease was primarily attributable to a decrease in gains on
sales of securities of $510,000 from $680,000 in 2000 to $170,000 in year 2001,
a decrease in net interest and dividend income of $236,000 and a decrease in the
provision for loan losses of $150,000. Noninterest expense increased $888,000,
while federal and state income taxes decreased by $525,000 compared with the
same period in the prior year.
Interest and Dividend Income
Total interest and dividend income increased $1.7 million, or 7.69%, to
$24.3 million for the 2001 period compared with $22.5 million in 2000. Interest
and dividends on securities increased $1.6 million to $5.8 million from $4.2
million, while interest income on loans increased $19,000.
The growth in interest and dividends on securities was due in part to a
$49.8 million, or 35.6%, increase in the average balance of securities. Interest
income on loans increased $19,000 for the period because total average loans
decreased $4.0 million. Indirect automobile loans
36
decreased $7.2$10.5 million from $71.2$71.1 million in the 2000 period to $64.0$60.6 million
in the 2001 period while commercial and industrial loans increased $7.3$12.2 million
to $40.3$48.7 million for June 2001.
Total interest-earning assets averaged $661.0 million for the six
months ended June 30, 2001, up 7.43% from $615.3 in the comparable 2000 period.
Interest Expense
Total interest expense for the six months ended June 30, 2001 increased
$2.0 million from the comparable 2000 period. This was attributable to the
higher average balance of total interest-bearing liabilities in 2001 of $581.6
million compared to $537.5 million for the comparable 2000 period. The increase
in average yield/cost of interest bearing liabilities of 4.62% for the 2001
period as compared to 4.26% for the same period in 2000 also contributed to the
increase in interest expense. This reflects the increase in average higher rate
certificates of deposits of $45.6 million.
Net Interest and Dividend Income
Net interest and dividend income for the six months ended June 30, 2001
decreased $236,000, or 2.13%, from $11.1 million in 2000 to $10.9 million for
2001. The net interest rate spread - the difference between the average yield on
average total interest earning assets and the average cost of average total
interest-bearing liabilities - decreased 35 basis points to 2.72% for 2001 from
3.07% for the prior year. The net interest margin, which is net interest and
dividend income divided by average total interest-earning assets, decreased 32
basis points to 3.28% for 2001.
Provision for Loan Losses
During the first six months ofended June 30, 2001, Westfield Bank provided
$600,000 for loan losses, compared to $750,000 for the comparable 2000 period.
The 2000 provision reflected significant growthfor loan losses brings Westfield Bank's allowance for loan losses
at the balance sheet date to a level deemed appropriate by management based on
the methodology discussed under "Allowance for Loan Losses." The allocation of
the provision among loan types and between the specific and formula components
of the allowance for losses is also determined based on the methodology
discussed under "Allowance for Loan Losses." The following factors resulted in a
decrease in the indirect automobile lending portfolio.provision for the six months ended June 30, 2001 compared to the
six months ended June 30, 2000:
o Loan concentrations - Consumer and residential real estate
loans decreased from $77.9 million and $250.1 million at June
30, 2000, respectively, to $67.0 million and $203.2 million at
June 30, 2001, respectively. These decreases reduced the
required allowance for consumer and residential real estate
loans. This decrease was partially offset by an increase of
$12.3 million in commercial and industrial loans which
resulted in an increase in the required allowance for this
loan type. Total loans decreased by $41.6 million or 9.9% from
June 30, 2000 to June 30, 2001 resulting in a decrease in the
overall allowance requirement.
o Credit quality - Net charge-offs of $464,000 at June 30, 2001
remained constant with net charge-offs of $446,000 at June 30,
2000. As net charge-offs remained relatively stable from June
30, 2000 to June 30, 2001, they had little impact on the
allowance requirement.
As a result of the allowance for loan loss methodology and
consideration of the above factors, management determined that a decrease in the
provision of $150,000 was appropriate.
At June 30, 2001, the allowance for loan losses as a percentage of
total loans was 0.84% as compared with 0.73%0.74% at June 30, 2000.
The provision for loan losses is based upon the assessment of the
overall loan portfolio and its underlying collateral, the mix of loans within
the portfolio, delinquency trends, economic conditions, current and prospective
trends in real estate values, and relevant factors. As Westfield Bank expands
its commercial business lending, additional increases to the provision for loan
losses are likely.
Noninterest Income
Noninterest income includes service fees on deposit accounts, other
service charges and net gains on sales of securities. Total noninterest income
decreased $485,000, or 36.6%, to $839,000 for 2001 compared to $1.3 million for
the 2000 period. The 2000 figure includes gains on sales of securities of
$680,000 as compared to $170,000 for the 2001 period.
37
Noninterest Expense
Total noninterest expense increased $888,000, or 13.4%, to $7.5 million
during 2001 compared with $6.6 million for the prior year. Salaries and employee
benefits increased $329,000, or 9.6%, to $3.8 million for 2001 compared with
$3.4 million for 2000, reflecting normal salary increases and additional
staffing costs associated with the hiring and training of additional employees
to staff the new Liberty Street Springfield branch and Northampton Street
Holyoke branch, which both opened in June 2001. During the period in 2001,
Westfield Bank instituted a 401(k) matching program for its employees which
resulted in a charge of $56,000.
The efficiency ratio, determined by dividing noninterest expense by the
sum of net interest income and noninterest income excluding gains on securities
transactions, was 58.43% for 2001 compared with 56.34% for the 2000 period. The
ratio of noninterest expense to average assets was 2.13% for 2001 and 2.05% for
2000. In future periods, the occupancy expense may increase because of the cost
of Westfield Bank's expanded West Springfield location and the opening of its
new Liberty Street, Springfield branch and its new Northampton Street, Holyoke
branch. Annual operating expenses are expected to increase in the near term due
to future product and service expansion and the increased costs of operating as
a public company.
Income Taxes
Income tax expense decreased $525,000, or 30.1%, to $1.2 million for
2001, resulting in an effective tax rate of 34.0% for the six months ended June
30, 2001 and 34.6% for the 2000 period. The effective tax rate also reflects the
utilization of Westfield Mutual Holding Company as a qualified securities
corporation and Elm Street Real Estate Investments, Inc., a wholly owned
subsidiary of Westfield Bank, as a real estate investment trust.
Comparison of Financial Condition at December 31, 2000 and 1999
The consolidated assets increased $56.2 million, or 8.8%, to 694.8$694.8
million at December 31, 2000 from $638.6 million at December 31, 1999.
Investment securities increased $49.2 million, or 39.1%, to $174.6 million at
December 31, 2000 from $125.5 million at December 31, 1999. Federal funds sold
increased from $2.6 million at December 31, 1999 to $10.0 million at December
31, 2000. Commercial and industrial loans increased $4.8 million from $32.7
million to $37.5 million at December 31, 2000 and 1999 respectively.
Asset growth was funded primarily by an increase of $50.9 million in
deposits, to $601.9 million at December 31, 2000 compared to $551.0 million at
December 31, 1999. Time certificates of deposit increased $49.2 million from
$323.6 million at December 31, 1999 to $372.8 at December 31, 2000. Demand
deposits also showed significant growth of $8.9 million, or 30.1%, to $38.5
million at December 31, 2000 from $29.6 million at December 31, 1999.
At December 31, 1999, Westfield Bank had $5.0 million in borrrowings
from the Federal Home Loan Bank as a method of funding perceived cash needs as a
result of Y2K. There were no borrowings at December 31, 2000.
Customer repurchase agreements increased $4.4 million, or 134.8%, from
$3.3 million to $7.7 million at December 31, 1999 and 2000 respectively.
38
Total equity increased $6.5 million, or 9.1% to $77.8 million at
December 31, 2000 from $71.2 at December 31, 1999. This was primarily the result
of net income of $6.1 million and an increase in unrealized gains on investment
securities available for sale of $430,000 for the year ended December 31, 2000.
Comparison of Operating Results for the Years Ended December 31, 2000 and 1999
General
Net income of $6.1 million for 2000 represents a $553,000, or 10.0%,
increase from 1999 earnings of $5.5 million. This increase was due primarily to
the growth in securities of $49.2 million and an increase in commercial and
industrial loans of $4.8 million, or 14.8%, from $32.7 million in 1999 to $37.5
million in 2000.
Interest and Dividend Income
Total interest and dividend income increased $4.9 million to $46.7
million for 2000 compared to $41.9 million for 1999. The average balance of
interest earning assets increased $56.8 million, or 9.9%, and the yield on
earning assets increased from 7.32% in 1999 to 7.43% for 2000.
The previously mentioned growth in securities is the primary reason for
the rise in interest and dividend income. Interest and dividends on investment
securities increased $2.4 million, or 33.4%, from $7.2 million in 1999 to $9.6
million in 2000. The yield on investment securities also increased substantially
from 6.18% in 1999 to 6.47% in 2000.
Interest Expense
Interest expense increased $3.4 million, or 16.0%, to $24.5 million for
2000 compared with $21.2 million for 1999. The average balance of total
interest-bearing deposits increased $36.9 million in 2000 to $540.0 million,
while the average cost of deposits increased 27 basis points to 4.46%. The
combination of the deposit growth and the increase in cost of funds produced a
$3.4 million increase in interest expense for the year. The average balance of
borrowed funds increased in 2000 by $6.2 million and the average cost of
borrowings increased 73 basis points to 5.53% in 2000. The customer repurchase
agreements produced an increase in interest expense of approximately $279,000
compared with 1999.
Net Interest and Dividend Income
Net interest and dividend income for 2000 was $22.2 million as compared
with $20.7 million for 1999. Net interest rate spread decreased to 2.95% for
2000 from 3.13% for the prior year. Net interest margin decreased to 3.53% for
2000 compared with 3.62% for 1999. The decrease in net interest income is
primarily the result of the increase in higher cost certificates of deposit.
39
Provision for Loan Losses
During 2000, Westfield Bank provided $1.1 million for loanloans losses,
compared to $843,000 for 1999. The higher provision in 2000 reflects the growth
infor loan losses brings Westfield
Bank's allowance for loan losses to a level deemed appropriate by management
based on the methodology discussed under "Allowance for Loan Losses." The
allocation of the provision among loan types and between the specific and
formula components of the allowance for losses is also determined based on the
methodology discussed under "Allowance for Loan Losses." The following factors
resulted in an increase in the provision for 2000 as compared to 1999:
o Loan concentrations - Commercial real estate loans and commercial
and industrial loans.loans increased $8.3 million or 6.8%. Westfield
Bank considers these types of loans to contain more inherent risk than
conventional residential mortgages.mortgages which remained relatively
constant. These increases resulted in an increase in the
allowance requirements for commercial real estate and commercial
and industrial loans. These increases were partially offset by a
decrease in consumer loans from $83.4 million at December 31,
1999 to $73.3 million at December 31, 2000 resulting in a
decrease in the allowance requirement for consumer loans.
o Credit quality - Actual loss experience on loans increased
significantly with net charge-offs totaling $1.1 million in 2000
vs. $545,000 in 1999. Net loans charged off as a percent of
average loans outstanding increased from 0.08% to 0.17% in 2000.
This increase was partially offset by a decrease in non-accrual
loans from $2.8 million at December 31, 1999 to $2.3 million at
December 31, 2000. The increase in net charge-offs increases the
loss factors applied to outstanding loans and results in an
increase in the allowance requirement.
As a result of the detailed allowance for loan loss methodology and
consideration of the above factors, management determined that an increase in
the provision of $246,000 was appropriate.
The allowance for loan losses at the end of 2000 was 0.73% of total
loans compared with 0.66% at the end of 1999. The increase in the coverage ratio
reflects the changechanges in the loan portfolio composition described above.
Noninterest Income
Noninterest income increased to $2.9 million in 2000 compared with $1.6
million the year before. Security gains were $1.5 million in 2000, up from
$515,000 in 1999. The gains in 2000 were primarily from the sale of common stock
holdings. In the future, Westfield Bank intends to increase noninterest income
by broadening its product line and increase the delivery channels through which
Westfield Bank delivers products and services, including the enhancement of its
Internet Banking and Telephone Banking services.
Noninterest Expense
Total noninterest expense increased $1.7 million, or 13.1%, to $14.7
million in 2000 compared with $13.0 million for the prior year. Salaries and
benefits expense represented $877,000 of the increase. In July 1999, Westfield
Bank increased its staffing levels in order to open its branch office on Main
Street in Springfield, Massachusetts. Other noninterest expense increased
$526,000 mainly as the result of a loss due to a check kiting scheme by one of
its customers. Occupancy expense increased by $244,000 as a result of Westfield
Bank's main office expansion and the opening of the above mentioned Springfield,
Massachusetts office.
Income Taxes
Income taxes increased $287,000, or 9.9%, to $3.2 million in 2000. The
effective tax rate was 34.4% in 2000 and 1999. The effective tax rate also
reflects the utilization of Westfield Mutual Holding Company as a qualified
securities corporation and Elm Street Real Estate Investments, Inc., a wholly
owned subsidiary of Westfield Bank, as a real estate investment trust.
Comparison of Financial Condition at December 31, 1999 and 1998
The consolidated total assets increased $56 million, or 9.6%, to $638.6
million at December 31, 1999 from $582.6 million at December 31, 1998. Total
loans increased $52.8 million, or 12.6%, to $470.3 million at December 31, 1999
from $417.5 million at December 31, 1998. Total securities increased $5.9
million to $125.5 million at December 31, 1999.
Asset growth was funded primarily by an increase in deposits of $42.7
million, or 8.4%, to $551.0 million at December 31, 1999 from $508.3 million at
December 31, 1998. Time certificates of deposit increased $43.2 million making
up the total deposit increase.
40
Total equity increased $4.6 million, or 6.9%, to $71.2 million at
December 31, 1999 from $66.7 million at December 31, 1998. This was primarily
the result of net income of $5.5 million and a decrease of $954,000 in
unrealized gains on securities available for sale for the year ended December
31, 1999.
Comparison of Operating Results for the years Ended December 31, 1999 and 1998
General
Net income of $5.5 million for 1999 represents a $415,000, or 8.1%,
increase from 1998 earnings of $5.1 million. This increase was due primarily to
the growth in loans of $52.8 million, which included a $37.2 million gain
indirect automobile loans to $76.0 million in 1999 from $38.8 million in 1998.
Interest and Dividend Income
Total interest and dividend income increased $1.1 million to $41.9
million for 1999 compared to $40.8 million in 1998. The average balance of
interest earning assets increased $39.6 million, or 7.4%, and the yield
decreased from 7.66 % in 1998 to 7.32% in 1999.
Interest on consumer loans increased $2.3 million, or 73.7%, to $5.5
million in 1999 from $3.2 million in 1998. This was primarily the result of the
above mentioned increase in indirect automobile lending during 1999.
Interest Expense
Interest expense decreased $137,000 from $21.3 million in 1998 to $21.2
million in 1999. Average total interest-bearing deposits increased $28.1 million
to $503.1 million in 1999 from $475.0 million in 1998; however, the cost of
funds decreased from 4.48% in 1998 to 4.19% in 1999.
Net Interest and Dividend Income
Net interest and dividend income for 1999 was $20.7 million as compared
with $19.5 million for 1998. The net interest rate spread decreased to 3.13% for
1999 compared with 3.18% for 1998. The primary reason for the $1.2 million
increase in net interest and dividend income is the substantial increase in
indirect automobile loans mentioned above.
Provision for Loan Losses
During 1999, Westfield Bank provided $843,000 for loan losses, compared
withto $293,000 for 1998. The higher provision reflectsfor loan losses brings Westfield Bank's
allowance for loan losses to a level deemed appropriate by management based on
the substantialmethodology discussed under "Allowance for Loan Losses." The allocation of
the provision among loan types and between the specific and formula components
of the allowance for losses is also determined based on the methodology
discussed under "Allowance for Loan Losses." The following factors resulted in
the increase in Westfield Bank'sthe provision for 1999 as compared to 1998:
o Loan concentration - Commercial real estate and commercial and
industrial increased $6.7 million or 5.8% and indirect
automobile lending. Westfield Bank considers these
typesloans increased from $38.8 million at December 31,
1998 to $76.0 million at December 31, 1999 or 96%. These
increases resulted in an increase in the allowance
requirement.
o Credit quality - Nonperforming loans increased from $800,000
at December 31, 1998 to $2.8 million at December 31, 1999. As
a percentage of total loans nonperforming loans increased from
0.20% at December 31, 1998 to contain more inherent risk than residential mortgage loans.0.59% at December 31, 1999. Net
charge-offs as a percentage of average loans outstanding
decreased from 0.11% at December 31, 1998 to 0.08% at December
31, 1999.
As a result of the detailed allowance for loan methodology and
consideration of the above factors, management determined that an increase in
the provision of $550,000 was appropriate.
41
The allowance for loan losses at the end of 1999 was 0.66% of total
loans compared with 0.63% in 1998. This increase in the coverage ratio reflects
the change in the loan portfolio composition described above.
Noninterest Income
Noninterest income increased $352,000 to $1.6 million in 1999 from $1.2
million in 1998. Security gains were $515,000 in 1999, up from $269,000 in 1998.
The gains in both years were primarily from the sale of common stock holdings.
In the future, Westfield Bank intends to broaden its products line and increase
the delivery channels through which it delivers products and services, including
the enhancement of its Internet Banking and Telephone Banking services.
Noninterest Expense
Total noninterest expense increased $754,000 or 6.2% to $13.0 million
in 1999 compared with $12.2 million in 1998. Salaries and benefits represented
$518,000. A net increase of 9 employees and normal salary increases accounts for
the variance. Indirect automobile lending loan processing charges increased
$490,000. A substantial increase in the number of indirect automobile loan
applications was the reason for this increase.
Income Taxes
Income taxes decreased $164,000, or 5.4%, to $2.9 million in 1999. The
effective tax rate was 34.4% in 1999 and 37.5% in 1998. The effective tax rate
reflects the utilization of Westfield Mutual Holding Company as a qualified
securities corporation and Elm Street Real Estate Investments, Inc., a wholly
owned subsidiary of Westfield Bank, as a real estate investment trust.
Liquidity and Capital Resources
The term "liquidity" refers to our ability to generate adequate amounts
of cash to fund loan originations, loan purchases, deposit withdrawals and
operating expenses. Our primary sources of liquidity are deposits, scheduled
amortization and prepayments of loan principal and mortgage-backed securities,
maturities and calls of investment securities and funds provided by our
operations. Westfield Bank also can borrow funds from the Federal Home Loan Bank
based on eligible collateral of loans and securities. Westfield Bank's maximum
borrowing capacity from the Federal Home Loan Bank is approximately $264.0
million, net of borrowings that are already outstanding. In addition, we may
enter into reverse repurchase agreements with approved broker-dealers. Reverse
repurchase agreements are agreements that allow us to borrow money using our
securities as collateral.
We had no outstanding borrowings from Federal Home Loan Bank at either
December 31, 2000 or June 30, 2001.
Maturing investment securities are a relatively predictable source of
funds. However, deposit flows, calls of securities and prepayments of loans and
mortgage-backed securities are strongly influenced by interest rates, general
and local economic conditions and competition in the marketplace. These factors
reduce the predictability of the timing of these sources of funds.
42
Our primary investing activities are the origination of residential
real estate, commercial real estate, commercial and industrial and consumer
loans, and the purchase of mortgage-backed and other investment securities.
During the first six months of 2001, Westfield Bank originated loans of
approximately $112.7 million, and during the comparable period of 2000,
Westfield Bank originated loans of approximately $56.0$83.2 million. Purchases of
securities totaled $68.5 million for the first six months of 2001 and $48.1
million for the six months of 2000. At June 30, 2001, Westfield Bank had loan
commitments to borrowers of approximately $18.4 million, and available home
equity and unadvanced lines of credit of approximately $42.1 million.
Deposit flows are affected by the level of interest rates, by the
interest rates and products offered by competitors and by other factors. Total
deposits increased $10.3 million and $17.3 million during the first six months
of 2001 and 2000, respectively. Time deposit accounts scheduled to mature within
one year were $264.1 million at June 30, 2001. Based on Westfield Bank's deposit
retention experience and current pricing strategy, it anticipates that a
significant portion of these certificates of deposit will remain on deposit. We
monitor our liquidity position frequently and anticipate that we will have
sufficient funds to meet our current funding commitments.
At June 30, 2001, we exceeded each of the applicable regulatory capital
requirements. Our leverage tier 1 capital was $79.3 million, or 17.38% of
risk-weighed assets, and 11.21% of average assets. We had a risk-based total
capital of $83.1 million and a risk-based capital ratio of 18.23%.
We do not anticipate any other material capital expenditures during
calendar year 2001, nor do we have any balloon or other payments due on any
long-term obligations or any off-balance sheet items other than the commitments
and unused lines of credit noted above.
Management of Market Risk
As a financial institution, our primary market risk is interest rate
risk since substantially all transactions are denominated in U.S. dollars with
no direct foreign exchange or changes in commodity price exposure. Fluctuations
in interest rates will affect both our level of income and expense on a large
portion of its assets and liabilities. Fluctuations in interest rates will also
affect the market value of all interest earning assets.
The primary goal of our interest rate management strategy is to limit
fluctuations in net interest income as interest rates vary up or down and
control variations in the market value of assets, liabilities and net worth as
interest rates vary. We seek to coordinate asset and liability decisions so
that, under changing interest rate scenarios, net interest income will remain
within an acceptable range.
To achieve the objectives of managing interest rate risk, Westfield
Bank's Asset and Liability Management Committee meets monthly to discuss and
monitor the market interest rate environment relative to interest rates that are
offered on its products. The Asset and Liability Management Committee presents
periodic reports to the Board of Directors of Westfield Bank and the Board of
Trustees of Westfield Mutual Holding Company at their regular meetings.
43
Historically, Westfield Bank's lending activities have emphasized
residential real estate and commercial real estate loans. However, since 1996,
Westfield Bank has increased its emphasis on commercial and consumer lending and
deposit relationships. Commercial and industrial loans and consumer loans have
grown 166.8% and 105.0%, respectively, since December 31, 1996. Commercial and
industrial loans have also grown 47.0%49.0% since December 31, 1999. The indirect
automobile loan portfolio grew substantially in 1999 as a result of aggressive
pricing and the addition of several new automobile dealers. Management
determined to temporarily curtail its indirect lending in fiscal year 2000 to
allow the portfolio to become more seasoned, but may decide to grow the indirect
automobile loan portfolio in the future. We believe that Westfield Bank's
increased emphasis on commercial and consumer lending will allow it to diversify
its loan portfolio while continuing to meet the needs of the businesses and
individuals that it serves.
Westfield Bank's primary source of funds has been deposits, consisting
primarily of time deposits, money market accounts, savings accounts, demand
accounts and NOW accounts, which have shorter terms to maturity than the loan
portfolio, and transaction accounts. Several strategies have been employed to
manage the interest rate risk inherent in the asset/liability mix, including but
not limited to:
o maintaining the diversity of our existing loan portfolio
through the origination of commercial loans, commercial real
estate loans and consumer loans which typically have variable
rates and shorter terms than residential mortgages; and
o emphasizing investments with expected short-term maturities of
five years or less.
In addition, emphasis on commercial and consumer loans has reduced the
average maturity of Westfield Bank's loan portfolio. Moreover, the actual amount
of time before loans are repaid can be significantly affected by changes in
market interest rates. Prepayment rates will also vary due to a number of other
factors, including the regional economy in the area where the loans were
originated, seasonal factors, demographic variables and the assumability of the
loans. However, the major factors affecting prepayment rates are prevailing
interest rates, related financing opportunities and competition. We monitor
interest rate sensitivity so that we can adjust our asset and liability mix in a
timely manner and minimize the negative effects of changing rates.
Net Interest and Dividend Income Simulation. We use a simulation model
to monitor interest rate risk. This model reports the net interest income at
risk primarily under three different interest rate environments. Specifically,
an analysis is performed of changes in net interest income assuming changes in
interest rates, both up and down 100, 200 and 300 basis points from current
rates over the one year time period following the current financial statement.
The changes in interest income and interest expense due to changes in
interest rates reflect the interest sensitivity of our interest earning assets
and interest bearing liabilities. For example, in a rising interest rate
environment, the interest income from an adjustable rate mortgage will increase
depending on its repricing characteristics while the interest income from a
fixed rate loan would not increase until it was repaid and loaned out at a
higher interest rate.
44
The tables below set forth as of June 30, 2002 the estimated changes in
net interest and dividend income that would result from incremental changes in
interest rates over the applicable twelve-month period.
For the Twelve Months Ended June 30, 2002
(Dollars in thousands)
------------------------------------------------------
Changes in
Interest Rates (Basis Net Interest
Points) Income % Change
--------------------- ------------- -------
300 $ 21,700 (2.4)%
200 22,234 (1.3)
100 22,529 (1.8)
0 22,953 -
-100 22,724 (1.0)
-200 22,593 (0.6)
-300 22,312 (1.2)
Market rates were assumed to increase and decrease 100 basis points,
200 basis points, and 300 basis points in even increments over the twelve month
period. The repricing and/or new rates of assets and liabilities moved in tandem
with market rates. However, in certain deposit products, the use of data from a
historical analysis indicated that the rates on these products would move only a
fraction of the rate change amount.
Westfield Bank developed balance sheet growth projections for the
twelve month period. The same product mix and growth strategy was used for all
seven rate scenarios.
Pertinent data from each loan account, deposit account and investment
security was used to calculate future cash flows. The data included such items
as maturity date, payment amount, next repricing date, repricing frequency,
repricing index and spread. Prepayment speed assumptions were based upon the
difference between the account rate and the current market rate.
Another circumstance that affects the results is that market rates are
relatively low. In the three declining rate scenarios, Westfield Bank forecasted
that its rates on some deposit products would not fall as sharply as market
rates. For example, because the rate on regular savings accounts is 1.05%, it is
not possible for the rate to decrease by 200 basis points or 300 basis points.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations." SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets," which is effective January 1, 2002. SFAS No. 142 requires,
among other things, the discontinuance of goodwill amortization, the
reclassification of certain existing recognized intangibles as goodwill, the
reassessment of the useful lives of existing recognized intangibles and the
identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires a transitional goodwill
impairment test six months from the date of adoption.
Westfield Mutual Holding Company does not believe the adoption of these
standards will have a material effect on its consolidated financial statements.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and accompanying Notes of
Westfield Mutual Holding Company have been prepared in accordance with GAAP.
GAAP generally requires the measurement of financial position and operating
results in terms of historical dollars without consideration for changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of Westfield Bank's operations.
Unlike industrial companies, Westfield Bank's assets and liabilities are
primarily monetary in nature. As a result, changes in market interest rates have
a greater impact on performance than do the effects of inflation.
45
Business of Westfield Bank
General
Westfield Bank is a Massachusetts-chartered stock savings bank that is
currently a wholly-owned subsidiary of Westfield Mutual Holding Company, a
Massachusetts-chartered mutual holding company. Westfield Bank was formed in
1853 and reorganized into a mutual holding company structure (without a stock
offering) in 1995. Historically, it has been a community-oriented provider of
banking products and services to business organizations and individuals,
including traditional products such as residential and commercial real estate
loans, consumer loans, and a variety of deposit instruments.
In recent years, in addition to real estate lending, Westfield Bank has
adopted a growth-oriented strategy focused on increased emphasis on commercial
and industrial and consumer lending and deposit relationships, extending its
branch network and broadening its product lines and services. Westfield Bank
believes that this business strategy is best for its long term success and
viability, and complements its existing commitment to high quality customer
service.
Westfield Bank operates through 10 banking offices in Agawam, East
Longmeadow, Holyoke, Southwick, Springfield, West Springfield and Westfield,
Massachusetts. In addition, it provides online banking services through its web
site (http://www.westfieldbank.com).
Westfield Bank's revenues are derived principally from interest on its
loans and interest and dividends on its investment securities. Its primary
sources of funds are deposits, scheduled amortization and prepayments of loan
principal and mortgage-backed securities, maturities and calls of investment
securities, and funds provided by operations. Westfield Bank also may use
borrowings from the Federal Home Loan Bank as a source of funds for loans,
investments and other assets, but as of June 30, 2001, it did not have any
borrowed funds from the Federal Home Loan Bank. See "-- Sources of Funds."
Market Area
Westfield Bank conducts its operations out of its main office in
Westfield, Massachusetts. It also operates through nine other banking offices
located in Westfield and in the communities of Agawam, East Longmeadow, Holyoke,
Southwick, Springfield and West Springfield, Massachusetts. Its deposits are
gathered from the general public in these towns and surrounding communities, and
its lending activities are concentrated primarily in Hampden County,
Massachusetts.
The city of Westfield is largely suburban and is located in the Pioneer
Valley near the intersection of U.S. Interstates 90 (the Massachusetts Turnpike)
and 91. Interstate 90 is the major east-west highway that crosses Massachusetts.
Interstate 91 is the major north-south highway that runs directly through the
heart of New England. Westfield is located approximately 90 miles west of
Boston, Massachusetts, 70 miles southeast of Albany, New York and 30 miles north
of Hartford, Connecticut. Westfield's 2000 population was
46
approximately 37,500 and the estimated 2000 population for Hampden County was
approximately 437,000.
The economy of Westfield Bank's market area historically has been
supported by a variety of industries. Its primary market area has benefited from
the presence of large employers centered in insurance, health care, warehouse,
manufacturing and education. Among the largest employers currently in its market
area are American Saw, Bay State Health Systems, Friendly Ice Cream Corporation,
Hasbro, Mass Mutual Life Insurance Company, Mestek, Noble Hospital, C&S
Wholesale, the University of Massachusetts, Westfield State College and the
Sullivan Paper Company. In addition, other employment and economic activity is
provided by substantial number of small and medium size businesses in the area.
OverDuring the past few years,late 1990's, the regional economy in Westfield Bank's
primary market area, based on economic indicators, such as unemployment rates,
vacancy rates and household income trends, has strengthened, and residential and
commercial real estate values in some areas approach the market values existing
before the economic downtown in the late 1980s. As of December 2000, the
unemployment rate of Westfield Bank's primary market area and Massachusetts showed a significant decrease from prior years and was
3.1% and 2.4%, respectively, as compared to the national average of 4.0%. From
1998 to 1999, the median household income in Westfield Bank's market area
increased by 6.0% to $45,635 compared to a 2.1% increase in Massachusetts and a
2.7% increase nationally. Despite the increases, the median household income in
Westfield Bank's market area is below state and national averages.
Westfield Bank's future growth opportunities will be influenced by the
growth and stability of the statewide and regional economies, other demographic
population trends and the competitive environment. Westfield Bank believes that
it has developed lending products and marketing strategies to address the
diverse credit-related needs of the residents in its market area.
Competition
Westfield faces intense competition both in making loans and attracting
deposits. Its primary market area is highly competitive and it faces direct
competition from a significant number of financial institutions, many with a
local, state-wide or regional presence and, in some cases, a national presence.
Many of these financial institutions are significantly larger than and have
greater financial resources than Westfield Bank.
In the past year, however, the regional economy in Westfield Bank's
primary market area has showed signs of weakening. Unemployment rates in
Westfield Bank's market area have increased over the past years and Westfield
Bank expects that unemployment rates may increase further as the regional and
national economy weakens. Westfield Bank's competition for loans comes
principally from commercial banks, savings institutions, mortgage banking firms,
credit unions, finance companies, mutual funds, insurance companies and
brokerage and investment banking firms. Westfield Bank's most direct competition
for deposits has historically come from commercial banks, savings banks,
co-operative banks and credit unions. Westfield Bank faces additional
competition for deposits from short-term money market funds and other corporate
and government securities funds and from brokerage firms and insurance
companies. Historically, Westfield Bank's most direct competition for deposits
has come from savings, co-operative and commercial banks.
47
Lending Activities
Loan Portfolio Composition. Westfield Bank's loan portfolio primarily
consists of residential real estate loans, home equity loans, commercial real
estate loans, commercial and industrial loans and consumer loans.
At June 30, 2001, Westfield Bank had total loans of $425.1 million, of
which $203.2 million were residential mortgage loans and $12.5 million were home
equity loans. Of residential mortgage loans outstanding at that date, 37.59%
were adjustable-rate loans and 62.41% were fixed-rate loans. The remainder of
its loans at June 30, 2001 consisted of commercial real estate loans, commercial
and industrial loans, and consumer loans. Commercial real estate loans
outstanding at June 30, 2001 totaled $93.7 million, or 22.05% of total loans.
Commercial and industrial loans outstanding at June 30, 2001 totaled $48.7
million, or 11.46% of total loans. Consumer loans outstanding on June 30, 2001
totaled $67.0 million, or 15.8% of total loans.
Westfield Bank's loans are subject to federal and state law and
regulations. The interest rates Westfield Bank charges on loans are affected
principally by the demand for loans, the supply of money available for lending
purposes and the interest rates offered by its competitors. These factors are,
in turn, affected by general and local economic conditions, monetary policies of
the federal government, including the Federal Reserve Board, legislative tax
policies and governmental budgetary matters.
48
The following table presents the composition of Westfield Bank's loan
portfolio in dollar amounts and in percentages of the total portfolio at the
dates indicated.
At December 31,
At June 30, ------------------------------------------------------------------
2001 2000 1999 1998
--------------------- --------------------- -------------------- ---------------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- --------- -------- -------- -------- -------- --------
(Dollars in thousands)
Real estate loans:
Residential .................. $203,159 47.79% $ 250,945 53.64% $250,625 53.29% $239,972 54.47%57.47%
Home equity loans ............ 12,538 2.95 13,217 2.83 14,258 3.03 14,858 3.56
Commercial ................... 93,726 22.04 92,826 19.84 89,333 18.99 90,026 21.56
-------- ----- --------- ----- -------- ----- -------- -----
Total real estate loans .... 309,423 72.78 356,988 76.31 354,216 75.31 344,856 82.59
-------- ----- --------- ----- -------- ----- -------- -----
Other loans:
Commercial and industrial .... 48,696 11.46 37,510 8.02 32,673 6.95 25,353 6.07
Indirect auto ................ 60,586 14.25 66,168 14.14 76,006 16.16 38,799 9.30
Consumer, other .............. 6,434 1.51 7,171 1.53 7,436 1.58 8,524 2.04
-------- ----- --------- ----- -------- ----- -------- -----
Total other loans .......... 115,716 27.22 110,849 23.69 116,115 24.69 72,676 17.41
-------- ----- --------- ----- -------- ----- -------- -----
Total loans ................ 425,139 100.00% 467,837 100.00% 470,331 100.00% 417,532 100.00%
Less:
Net deferred loan fees ....... 212 128 231 184
Allowance for loan losses .... (3,570) (3,434) (3,118) (2,632)
-------- --------- -------- --------
Total loans, net ........... $421,781 $ 464,531 $467,444 $415,084
======== ========= ======== ========
At December 31,
------------------------------------------
1997 1996
-------------------- -------------------
Percent Percent
Amount of Total Amount of Total
------- -------- -------- --------
Real estate loans:
Residential .................. 219,841 56.72%56.67% $197,902 55.96%55.87%
Home equity loans ............ 19,110 4.93 13,724 3.883.87
Commercial ................... 96,151 24.81 91,126 25.7696,490 24.87 91,687 25.88
------- ----- -------- -----
Total real estate loans .... 335,102 86.46 302,752 85.60335,441 86.47 303,313 85.62
------- ----- -------- -----
Other loans:
Commercial and industrial .... 21,396 5.525.51 18,253 5.165.15
Indirect auto ................ 21,937 5.66 22,272 6.29
Consumer, other .............. 9,144 2.36 10,424 2.952.94
------- ----- -------- -----
Total other loans .......... 52,477 13.5413.53 50,949 14.4014.38
------- ----- -------- -----
Total loans ................ 387,579387,918 100.00% 353,701354,262 100.00%
Less:
Net deferred loan fees ....... 348 10
Allowance for loan losses .... (2,791) (3,094)(3,130) (3,655)
------- --------
Total loans, net ...........$385,136 $350,617385,475 $351,178
======== ========
49
Loan Maturity and Repricing. The following table shows the repricing
dates or contractual maturity dates as of June 30, 2001. The table does not
reflect prepayments or scheduled principal amortization.
At June 30, 2001
---------------------------------------------------------------------------
Commercial
Residential Home Commercial and
Real Estate Equity Real Estate Industrial Consumer
Loans Loans Loans Loans Loans Totals
----------- -------- -------- --------- -------- --------
(In thousands)
Amounts due:
Within one year ............... $ 34,289 $ 12,538 $ 24,218 $ 29,687 $ 1,703 $102,435
After one year:
One to three years ......... 18,795 - 22,720 63,5096,381 23,027 70,923
Three to five years ........ 28,488 - 13,070 8,387 37,193 87,138
Five to ten years .......... 40,223 - 28,144 3,0893,809 4,961 77,137
Ten to twenty years ........ 43,752 - 4,566 102 - 48,420
Over twenty years .......... 37,612 - 1,008 330 136 39,086
--------- -------- -------- --------- -------- --------
Total due after one year ...... 168,870 - 69,508 19,008 65,318 322,704
--------- -------- -------- --------- -------- --------
Total amount due: 203,159 12,538 93,726 48,696 67,020 425,139
--------- -------- -------- --------- -------- --------
Less:
Net deferred loan origination
costs ...................... (224) 177 - - 259 212
Allowance for loan losses ..... (804) (50) (1,272) (741) (703) (3,570)
--------- -------- -------- --------- -------- --------
Loans, net ................. $ 202,131 $ 12,665 $ 92,454 $ 47,954 $ 66,577 $421,781
========= ======== ======== ========= ======== ========
50
The following table presents, as of June 30, 2001, the dollar amount of
all loans contractually due or scheduled to reprice after June 30, 2002 and
whether such loans have fixed interest rates or adjustable interest rates.
Due After June 30, 2002
--------------------------------------------------------------
Fixed Adjustable Total
----------- ---------- -----------
(In thousands)
Real Estate Loans
Residential ............................... $ 126,601 $ 42,269 $ 168,870
Home equity loans ......................... - - -
Commercial real estate .................... 10,668 58,840 69,508
Total real estate loans ................... 137,269 101,109 238,378
Other Loans
Commercial and industrial ................. 16,327 2,681 19,008
Consumer .................................. 65,298 20 65,318
Total other loans ......................... 81,625 2,701 84,326
----------- ---------- ----------
Total loans .................................. $ 218,894 $ 103,810 $ 322,704
=========== ========== ==========
51
The following table presents Westfield Bank's loan originations, sales
and principal payments for the periods indicated.
For the Six Months
Ended June 30, For the Year Ended December 31,
---------------------- ---------------------------------
2001 2000 2000 1999 1998
--------- ------- -------- -------- --------
(In thousands)
Loans:
Balance outstanding at beginning of period ..... $ 467,837 470,331 $470,331 $417,532 $387,579
Originations:
Real estate loans:
Residential ................................. 41,056 17,779 36,291 92,674 114,329
Home equity loans ........................... 6,198 4,449 8,246 8,084 7,601
Commercial 10,988 12,233 26,676 29,041 60,936
--------- ------- -------- -------- --------
Total mortgage originations .............. 58,242 34,461 71,213 129,799 182,866
Commercial and industrial loans ................ 42,444 35,78435,790 78,889 74,000 59,770
Consumer loans ................................. 11,994 12,986 26,415 66,869 34,503
--------- ------- -------- -------- --------
Total originations ....................... 112,680 83,23183,237 176,517 270,668 277,139
--------- ------- -------- -------- --------
Less:
Principal repayments, unadvanced funds and
other, net ............................... 94,839 86,321 178,003 217,512 235,423
Loan securitizations ........................... 60,075 - - - 10,108
Loan charge-offs ............................... 464 446 773 357 452
Transfers to foreclosed real estate ............ - 61 235 - 1,078
--------- ------- -------- -------- --------
Total deductions ......................... 155,378 86,828 179,011 217,869 247,061
Ending balance $ 425,139 $466,734$466,740 $467,837 $470,331 $417,532
========= ======== ======== ======== ========
Residential Real Estate Lending. Westfield Bank originates mortgage
loans secured by one-to four-family properties that serve as the primary
residence of the owner. Most of its loan originations are generated by referrals
from real estate brokers and builders, its marketing efforts and existing and
walk-in customers. As of June 30, 2001, loans on one- to four-family residential
properties accounted for $203.2 million, or 47.79%, of Westfield Bank's total
loan portfolio.
Westfield Bank currently originates residential real estate loans on
either a fixed-rate or adjustable-rate basis, as consumer demand dictates. The
maximum loan-to-value ratios depend on the type of property and the size of the
loan involved. The loan-to-value ratio is the loan amount divided by the
appraised value of the property. The loan-to-value ratio is a measure commonly
used by financial institutions to determine exposure to risk. The majority of
Westfield Bank's real estate loans are originated with a loan-to-value ratio of
80% or less. Loans originated with loan-to-value ratios in excess of 80% require
the borrower to obtain mortgage insurance.
Beginning on September 1, 2001, Westfield Bank will originaterefer its
residential real estate loans by referring its customersborrowers to a third party mortgage company. Residential
real estate borrowers will submit applications to Westfield Bank, but the loan
will be closed on the books of the mortgage company. Westfield Bank will receive
a fee of 65 basis points for each of these loans originated by Northeast Mortgage Company.the third party
mortgage company. Under the program, substantially all of Westfield Bank's
residential real estate loans will be underwritten and originated by the third
party mortgage company. In addition, depending on market conditions,
52
Westfield Bank intends to sell substantially all of the fixed-ratemay purchase residential real estate loans that it originates and usefrom the proceeds of these sales to
invest in commercial and industrial loans, consumer loans, commercial real
estate loans and investment securities. By selling substantially all of its
fixed-rate residential real estate loans,third party
mortgage company. Westfield Bank believes that this program will diversify its
loan portfolio and reduce its interest rate risk.
Westfield Bank's pricing strategy for mortgage loans includes setting
interest rates that are competitive with Fannie Mae and Freddie Mac and other
local financial institutions, and consistent with its internal needs. Westfield
Bank offers fixed-rate loans secured by family residences. These loans have
contractual maturities of up to 30 years and are fully amortizing, with payments
due monthly. These loans normally remain outstanding, however, for a
substantially shorter period of time because of refinancing and other
prepayments. A significant change in the current level of interest rates could
alter the average life of a residential loan in Westfield Bank's portfolio
considerably. Westfield Bank's residential real estate loans are generally not
assumable, do not contain prepayment penalties and do not permit negative
amortization of principal. Westfield Bank's residential real estate loans
generally contain a "due on sale" clause allowing it to declare the unpaid
principal balance due and payable upon the sale of the security property.
Westfield Bank also offers a variety of fixed-rate loans that it sells
to investors on a servicing released basis. These loans are underwritten to the
investors' standards and are sold to the investor after the loan closes.
Westfield Bank is an approved seller/servicer for both Fannie Mae and Freddie
Mac.
Westfield Bank offers adjustable-rate mortgage loans with either a
one-year, three-year or five-year term to the initial repricing date. After that
initial period, the interest rate for each adjustable-rate mortgage loan
generally adjusts annually for the remainder of the term of the loan. Westfield
Bank uses a different number of indices to reprice its adjustable-rate mortgage
loans.
Westfield Bank's residential adjustable-rate mortgage loans generally
are fully amortizing loans with contractual maturities of up to 30 years,
payments due monthly. Its adjustable-rate mortgage loans generally provide for
specified minimum and maximum interest rates, with a lifetime cap and floor, and
a periodic adjustment on the interest rate over the rate in effect on the date
of origination. As a consequence of using caps, the interest rates on these
loans are not generally as rate sensitive as its cost of funds. The
adjustable-rate mortgage loans that Westfield Bank originates generally are not
convertible into fixed-rate loans.
Adjustable-rate mortgage loans generally pose different credit risks
than fixed-rate loans, primary because as interest rates rise, the borrower's
payments rises, increasing the potential for default. Westfield Bank has not
experienced difficulty with the payment history for these loans. At June 30,
2001, its loan portfolio included $76.4 million in adjustable-rate residential
mortgage loans or 37.59%17.97% of its total loan portfolio, and $126.8 million in
fixed-rate residential real estate loans, or 62.41%29.83% of its total loan portfolio.
Westfield Bank's home equity loans, including lines of credit and home
improvement loans, totaled $12.6 million and comprised 2.95% of its total loan
portfolio at June 30, 2001. These loans may be originated in amounts of the
existing first mortgage, or up to 100% of the
53
value of the property securing the loan. The term to maturity on Westfield
Bank's home equity and home improvement loans may be up to 15 years.
Commercial Real Estate Loans. Westfield Bank originates commercial real
estate loans to finance the purchase of real property, which generally consists
of apartment buildings, business properties, multi-family investment properties
and construction loans to developers of commercial and residential properties.
In underwriting commercial real estate loans, consideration is given to the
property's historic cash flow, current and projected occupancy, location and
physical condition. At June 30, 2001, Westfield Bank's commercial real estate
loan portfolio consisted of 444 loans, totaling $93.7 million, or 22.04% of
total loans.
Substantially all of the commercial real estate portfolio consists of
loans which are collateralized by properties in Westfield Bank's normal lending
area. Westfield Bank's commercial real estate loan portfolio is diverse, and
does not have any significant loan concentration by type of property or
borrower. Westfield Bank generally lends up to a maximum loan-to-value ratio of
80% on commercial properties and require a minimum debt coverage ratio of 1.20
times. Its largest commercial real estate loan relationship had an outstanding
balance of $4.4 million at June 30, 2001 secured by apartment buildings located
in western Massachusetts.
Westfield Bank also offers construction loans to finance the
construction of commercial properties located in its primary market area.
Westfield Bank had $7.4 million in commercial construction loans and commitments
at June 30, 2001. Of this amount, approximately $3.7 million were loans made to
experienced developers with whom Westfield Bank has an established relationship,
$3.2 million of which was to a prominent developer to fund a single construction
project in Westfield, Massachusetts.
Commercial real estate lending involves additional risks compared with
one- to four-family residential lending. Payments on loans secured by commercial
real estate properties often depend on the successful management of the
properties, on the amount of rent from the properties, or on the level of
expenses needed to maintain the properties. Repayment of such loans may
therefore be adversely affected by conditions in the real estate market or the
general economy. Also, commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers. In order to
mitigate this risk, Westfield Bank monitors its loan concentration and its loan
policies generally limit the amount of loans to a single borrower or group of
borrowers.
Because of increased risks associated with commercial real estate
loans, Westfield Bank's commercial real estate loans generally have higher rates
and shorter maturities than residential mortgage loans. Westfield Bank usually
offers commercial real estate loans at adjustable rates tied to the prime rate
or to yields on U.S. Treasury securities. The terms of such loans generally do
not exceed 20 years.
Commercial and Industrial Loans. Westfield Bank offers commercial and
industrial loan products and services which are designed to give business owners
borrowing opportunities for modernization, inventory, equipment, construction,
consolidation, real estate, working capital, vehicle purchases and the financing
of existing corporate debt. Westfield Bank offers business installment loans,
vehicle and equipment financing, lines of credit, equipment leasing and other
commercial loans. At June 30, 2001, Westfield Bank's commercial and industrial
loan portfolio consisted of 765 loans, totaling $48.7 million or 11.46% of its
total loans. Since 1996,
54
commercial and industrial loans have grown $30.4 million, or 166.8% from $18.3
to $48.7 million. In addition, Westfield Bank has added four commercial loan
officers and one business development officer since 1997. Westfield Bank may
hire additional commercial loan officers on an as needed basis in connection
with its potential branch expansion.
As part of Westfield Bank's strategy of increasing its emphasis on
commercial lending, Westfield Bank seeks to attract its business customers'
entire banking relationship. All commercial borrowers are required to maintain a
commercial deposit at Westfield Bank. Westfield Bank also provides complementary
commercial products and services, including an equipment leasing program with a
third party vendor, a variety of commercial deposit accounts, cash management
services, sweep accounts, a broad ATM network and night deposit services.
Commercial loan officers are based in its main and branch offices, and Westfield
Bank views its recent and potential branch expansion as a means of facilitating
these commercial relationships. Westfield Bank intends to use the proceeds of
the stock offering to continue to expand the volume of its commercial business
products and services within its current underwriting standards.
Westfield Bank's commercial loan portfolio does not have any
significant loan concentration by type of property or borrower. The largest
concentration of loans were for loans to purchase machinery and equipment which
comprise approximately 1.5% of the total loan portfolio. At June 30, 2001,
Westfield Bank's largest commercial and industrial loan relationship was $5.9
million to a local machine distributor that provides enhanced engineering and
design to manufacturing companies in the medical, electronic and aerospace
industries by improving the quality or efficiency of equipment.
Commercial and industrial loans are limited to terms of seven years but
generally have terms of five years or less. Although Westfield Bank does
originate fixed-rate commercial loans, substantially all of its commercial loans
have variable interest rates tied to the prime rate. Whenever possible,
Westfield Bank also collateralizes these commercial and industrial loans with a
lien on commercial real estate. Alternatively, Westfield Bank may collateralize
these loans with a lien on business assets and equipment. In some cases, both
types of liens are required. Westfield Bank also generally requires the personal
guarantee of the business owner. Interest rates on commercial loans generally
have higher yields than residential or commercial real estate loans.
Commercial and industrial loans are generally considered to involve a
higher degree of risk than residential or commercial real estate loans because
the collateral may be in the form of intangible assets and/or inventory subject
to market obsolescence. Commercial and industrial loans may also involve
relatively large loan balances to single borrowers or groups of related
borrowers, with the repayment of such loans typically dependent on the
successful operation and income stream of the borrower. These risks can be
significantly affected by economic conditions. In addition, business lending
generally requires substantially greater oversight efforts by Westfield Bank's
staff compared to residential or commercial real estate lending. In order to
mitigate this risk, Westfield Bank monitors its loan concentration and its loan
policies generally limit the amount of loans to a single borrower or group of
borrowers. Westfield Bank also utilizes the services of an outside consultant to
conduct on-site credit quality reviews of the commercial and industrial loan
portfolio.
55
Consumer Loans. Consumer loans are generally originated at higher
interest rates than residential and commercial mortgage loans, but they also
generally tend to have a higher credit risk than residential mortgage loans
because they are usually unsecured or secured by rapidly depreciable assets.
Management, however, believes that offering consumer loan products helps to
expand and create stronger ties to Westfield Bank's existing customer base by
increasing the number of customer relationships and providing cross-marketing
opportunities.
Westfield Bank offers a variety of consumer loans to retail customers
in the communities its serves. Examples of its consumer loans include:
o direct and indirect automobile loans;
o secured passbook loans;
o credit lines tied to deposit accounts to provide overdraft
protection; and
o unsecured personal loans.
At June 30, 2001, the consumer loan portfolio totaled $67.0 million or
15.76% of total loans. Westfield Bank's increased emphasis on consumer lending
will allow it to diversify its loan portfolio while continuing to meet the needs
of the individuals and businesses that it serves.
Indirect automobile loans currently represent the largest portion of
its consumer loan portfolio, totaling $60.6 million, or 14.3% of its total loan
portfolio and 90.4% of its consumer loan portfolio, at June 30, 2001.
Westfield Bank offers fixed rate automobile loans in a direct and
indirect basis with terms up to 72 months for new and recent model used cars and
up to 60 months for older model used cars. Westfield Bank generally will make
such loans up to 100% of the retail value shown in the NADA Used Car Guide. The
interest rates offered differ depending on the age of the automobile and current
interest rates offered by competitors.
Westfield Bank began offering indirect automobile loans through
automobile dealers approximately eight years ago. Currently, Westfield Bank
maintains contractual relationships with approximately 40 new and used car
dealers located through western Massachusetts and northern Connecticut.
Westfield Bank has a contractual arrangement and outsources a portion of the
origination function and all of the servicing function to a nationally
recognized service provider. The collection and liquidation functions are
handled in-house by Westfield Bank personnel. Indirect auto loans are made only
after an underwriting review and approval under established guidelines set by
Westfield Bank. On loans originated by its automobile dealers, Westfield Bank
compensates the originator based upon the higher interest rate paid on the loan,
up to a maximum of 4%.
For the years ended December 31, 2000 and 1999, Westfield Bank
originated $21.3$20.3 million and $61.9$60.9 million of automobile loans, respectively,
substantially all of which were originated indirectly through the automobile
dealers in fiscal years 2000 and 1999, respectively. The substantial majority of
automobile loans are secured by used automobiles. The indirect loan portfolio
grew substantially in 1999 as the result of aggressive pricing and the addition
of several new dealers. Management determined to temporarily curtail its
indirect lending in fiscal year
56
2000 to allow the portfolio to become more seasoned, but may decide to grow the
indirect automobile loan portfolio in the future. Westfield Bank has not sold
any of its automobile loans since inception. Westfield Bank anticipates that in
the future it may sell a portion of its automobile loans in the secondary market
for liquidity purposes and to manage the credit risk of the loan portfolio.
Loans secured by rapidly depreciable assets such as automobiles or that
are unsecured entail greater risks than residential mortgage loans. In such
cases, repossessed collateral for a defaulted loan may not provide an adequate
source of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral. The
remaining deficiency often does not warrant further substantial collection
efforts against the borrower beyond obtaining a deficiency judgment. Further,
collections on these loans are dependent on the borrower's continuing financial
stability and, therefore, are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Repossessed collateral relating to
consumer loans at June 30, 2001 approximated $216,000. Finally, the application
of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans if a
borrower defaults.
Loan Approval Procedures and Authority. As established by the Executive
Committee of the Board of Directors, Westfield Bank's lending policies provide
that its mortgage underwriting department may review and approve mortgage loans
up to $500,000. Westfield Bank's underwriting department also may review and
approve home equity loans up to $100,000. Any loan applications, including
mortgage loans, that exceed $500,000 or $100,000 for home equity loans require
approval of the Executive Committee. For loans requiring board approval,
management is responsible for presenting to the board information about the
creditworthiness of a borrower and the estimated value of the subject property.
Generally, the estimated value of the property must be supported by an
independent appraisal report prepared in accordance with Westfield Bank's
appraisal policy.
The following generally describes Westfield Bank's current lending
procedures. Upon receipt of a completed loan application from a prospective
borrower, Westfield Bank must order a credit report and verify other
information. If necessary, Westfield Bank obtains additional financial or credit
related information. Westfield Bank requires an appraisal for all mortgage
loans. Appraisals for mortgage loans are performed by licensed or certified
third-party appraisal firms and are reviewed by Westfield Bank's lending
department. Appraisals for second mortgages or home equity loans are not
required. Rather, a designated employee of Westfield Bank conducts an inspection
of the property. Westfield Bank requires title insurance on all mortgage loans
and certain other loans. Westfield Bank requires borrowers to obtain hazard
insurance. Westfield Bank also requires borrowers to obtain flood insurance, if
applicable, prior to closing. In addition, Westfield Bank makes available to
borrowers the option to advance funds on a monthly basis together with each
payment of principal and interest to a mortgage escrow account from which it
makes disbursements for items such as real estate taxes, flood insurance, and
private mortgage insurance premiums. Beginning on September 1, 2001, Westfield
Bank will originate its residential real estate loans by referring its customers
to a third-party mortgage company. Residential real estate borrowers will submit
applications to Westfield Bank, but the loan will be closed on the books of the
mortgage company.
57
Asset Quality
One of Westfield Bank's key operating objectives has been and continues
to be the achievement of a high level of asset quality. Westfield Bank maintains
a large proportion of loans secured by residential and commercial properties,
set sound credit standards for new loan originations and follow careful loan
administration procedures. Westfield Bank also utilizes the services of an
outside consultant to conduct on-site credit quality reviews of Westfield Bank's
commercial and industrial loan portfolio on an annual basis. These practices and
relatively favorable economic and real estate market conditions have resulted in
historically low delinquency ratios and, in recent years, a low level of
nonaccrual loans. These factors have helped strengthen Westfield Bank's
financial condition.
Delinquent Loans and Foreclosed Assets. Westfield Bank's policies
require that management continuously monitor the status of the loan portfolio
and report to the Board of Directors on a monthly basis. These reports include
information on delinquent loans and foreclosed real estate, as well as Westfield
Bank's actions and plans to cure the delinquent status of the loans and to
dispose of the foreclosed property.
The following table presents information regarding non-accrual mortgage
and consumer and other loans, and foreclosed real estate as of the dates
indicated. All loans where the interest payment is 90 days or more in arrears as
of the closing date of each month are placed on non-accrual. At June 30, 2001
and December 31, 2000, 1999, and 1998, Westfield Bank had $2.3 million, $2.3
million, $2.8 million and $838,000, respectively, of non-accrual loans. If all
non-accrual loans had been performing in accordance with their original terms
and had been outstanding from the earlier of the beginning of the period or
origination, we would have recorded interest income on these loans of
approximately $238,000 for the applicable six month period in 2001.
At June 30, At December 31,
----------- ---------------------------------------------------------
2001 2000 1999 1998 1997 1996
----------- -------- ------ ------ ------ -------
(Dollars in thousands)
Non-accrual real estate loans
Residential ............................. $ 1,237 $ 1,180 $ 864 $ 262 $ 327 $ 1,631
Home equity loans ....................... 29 113 - - 42 -
Commercial real estate .................. 579 247 1,496 262 95 75
------- -------- ------ ------ ------ -------
Total non-accrual real estate loans ......... 1,845 1,540 2,360 524 464 1,706
Other loans:
Commercial and industrial ............... 277 392 35 137 206 -
Consumer ................................ 206 376 356 177 266 111
------- -------- ------ ------ ------ -------
Total non-accrual consumer and other loans .. $ 2,328 $ 2,308 $2,751 $ 838 $ 936 $ 1,817
======= ======== ====== ====== ====== =======
Total nonperforming loans ................... $ 2,328 $ 2,308 $2,751 $ 838 $ 936 $ 1,817
Foreclosed real estate, net ................. 46 - - 221 984 649
------- -------- ------ ------ ------ -------
Total nonperforming assets .................. $ 2,374 $ 2,308 $2,751 $1,059 $1,920 $ 2,466
======= ======== ====== ====== ====== =======
Nonperforming loans to total loans .......... 0.55% 0.49% 0.59% 0.20% 0.24% 0.51%
Nonperforming loans to total assets ......... 0.33 0.33 0.43 0.18 0.35 0.49
58
Allowance for Loan Losses. The following table presents the activity in
Westfield Bank's allowance for loan losses and other ratios at or for the dates
indicated.
At or for Six Months
Ended June 30, At or for Years Ended December 31,
--------------------- ----------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- ------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period .... $ 3,434 $ 3,118 $ 3,118 $ 2,632 $ 2,791 $ 3,094 $ 3,140
Charge-offs:
Residential .................... (16) - (12) (19) (292) (35) (81)
Commercial real estate ......... (17) - (20) - (8) (47) (511)
Home equity loans .............. - - - - - (48) -
Commercial and industrial ...... - (10) (42) (5) (156) (254) (35)
Consumer ....................... (684) (497) (985) (521) (294) (190) (181)
Total charge-offs ........... (717) (507) (1,059) (545) (750) (574) (808)
-------- -------- ------- ------- ------- ------- -------
Recoveries:
Residential .................... - - - 30 90 8 23
Commercial real estate ......... - - - 5 95 14 63
Home equity loans .............. - - - - 9 - -
Commercial and industrial ...... 9 5 8 18 57 5 37
Consumer ....................... 244 56 278 135 47 44 59
-------- -------- ------- ------- ------- ------- -------
Total recoveries ............ 253 61 286 188 298 71 182
-------- -------- ------- ------- ------- ------- -------
Net charge-offs ................... (464) (446) (773) (357) (452) (503) (626)
Provision for loan losses ......... 600 750 1,089 843 293 200 580
-------- -------- ------- ------- ------- ------- -------
Balance at end of period .......... $ 3,570 $ 3,422 $ 3,434 $ 3,118 $ 2,632 $ 2,791 $ 3,094
======== ======== ======== ======== ======== ======== ========
Total loans receivable(1) ......... $425,139 $466,734$466,740 $467,837 $470,331 $417,532 $387,579 $353,701
======== ======== ======== ======== ======== ======== ========
Average loans outstanding ......... $462,405 $465,298 $464,917 $443,982 $402,851 $376,186 $334,709
======== ======== ======== ======== ======== ======== ========
Allowance for loan losses as
a percent of total loans
receivable ................... 0.84% 0.73% 0.73% 0.66% 0.63% 0.72% 0.87%
Net loans charged off a
percent of average loans
outstanding ................. 0.10% 0.10% 0.17% 0.08% 0.11% 0.13% 0.19%
- ----------
(1) Does not include deferred fees.
59
Westfield Bank maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio based on ongoing quarterly assessments of the
estimated losses. Westfield Bank's methodology for assessing the appropriateness
of the allowance consists of several keya review of the components, which include a
specific allowance for identified problem loans and a formula allowance.allowance for
current performing loans. Fluctuations in the balances of impaired loans affect
the specific reserve while fluctuations in volume and concentrations of loans
affects the formula reserve while fluctuations in volume and concentrations of
loans affects the formula reserve and the allocation of the allowance of the
loan losses among loan types.
The specific allowance incorporates the results of measuring impairedimpairment
for specifically identified non-homogenous problem loans as provided in accordance with SFAS
No. 114 "Accounting byBy Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." These accounting standards prescribeIn accordance with SFAS No.'s 114 and 118 the measurement methods,
income recognitionspecific allowance
reduces the carrying amount of the impaired loans to their estimated fair value.
A loan is recognized as impaired when it is probable that principal and/or
interest are not collectible in accordance with the loan's contractual terms. A
loan is not deemed to be impaired if there is a short delay in receipt of
payment or if, during a longer period of delay, the Westfield Bank expects to
collect all amounts due including interest accrued at the contractual rate
during the period of delay. Measurement of impairment can be based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the fair value of the
collateral, if the loans is collateral dependent. Measurement of impairment does
not apply to large groups of smaller balance homogenous loans that are
collectively evaluated for impairment such as the Westfield Bank portfolios of
home equity loans, real estate mortgages, installment and disclosures related to impairedother loans.
The formula allowance is calculated by applying loss factors to
outstanding loans by type, excluding loans for which a specific allowance has
been determined. As part of this analysis, each quarter Westfield Bank prepares
an allowance for loan losses worksheet which categorizes the loan portfolio by
risk characteristics such as loan type and loan grade. Changes in the mix of
loans and the internal loan grades affect the amount of the formula allowance.
Loss factors are assigned to each category based on Westfield Bank's assessment
of each category's inherent risk. In determining the loss factors to apply to
each loan category, Westfield Bank considers historical losses, peer group
comparisons, industry data and loss percentages used by banking regulators for
similarly graded loans. Loss factors may be adjusted for qualitative factors
that, in management's judgment, affect the collectibility of the portfolio as of
the evaluation date. Loss factors are described as follows:
o Classified loan loss factors are derived from loss percentages
utilized by banking regulators for similarly graded loans. Loss
factors of 3% to 5%, 10% to 15% and 50% to 75% are applied to the
outstanding balance of loans internally classified special mention,
substandard and doubtful, respectively.
o Pass graded loan loss factors are based on historical loss experience.
The appropriateness ofactual losses for the
allowance is also reviewed by management
based upon its evaluation of then-existing economic and business conditions
affecting the key lending areas of Westfield Bank and other conditions,previous twelve quarters adjusted for qualitative factors, such as new
loan products, credit quality trends (including trends in
nonperforming loans expected to result from existing conditions),
collateral values, loan volumes and concentrations and specific
industry conditions within portfolio segments that existedexist at the
balance sheet date. The loss factors are applied to outstanding loans
by loan type.
In addition, management employs an independent third party to perform
an annual review of all of Westfield Bank's commercial loans with principal
balances greater than $600,000. A second objective of this review was all watch
list loans with aggregate balances greater than $100,000 and all 30 day or
longer past due commercial loans with balances in excess of $50,000.
Westfield Bank's methodologies include several factors that are
intended to reduce the difference between estimated and actual losses. The loss
factors that are used to establish the allowance for pass graded loans are
designated to be self-correcting by taking into account changes in loan
classification, loan concentrations and loan volumes and by permitting
adjustments based on management's judgments of qualitative factors as of the
balance sheet date andevaluation date. Similarly, by basing the impact that such
conditions were believedpass graded loan loss factors on loss
experience over the prior three years, the methodology is designated to have had on the collectibility of the loan
portfolio. There may be other factors that may warranttake
Westfield Bank's consideration in maintaining therecent loss experience into account.
Westfield Bank's allowance atmethodology has been applied on a level sufficient to cover
probable losses. Althoughconsistent
basis. Based on this methodology, Westfield Bank believes that it has
established and maintained the allowance for loan losses at adequate levels,
future adjustments to the allowance for loan losses may be necessary if
economic, real estate and other conditions differ substantially from the current
operating environment.environment resulting in estimated and actual losses differing
substantially. Adjustments to the allowance for loan losses are charged to
income through the provision for loan losses.
A summary of the components of the allowance for loan losses as of June
30, 2001, December 31, 2000 and December 31, 1999 is as follows:
June 30, 2001 December 31, 2000 December 31, 1999
------------------------------ ------------------------------ ------------------------------
Specific Formula Total Specific Formula Total Specific Formula Total
-------- ------- ------ -------- ------- ------- -------- ------- ------
(In thousands)
Real estate mortgage
Residential...... $ - $ 854 $ 854 $ - $ 859 $ 859 $ - $ 682 $ 682
Commercial....... 32 1,240 1,272 49 1,187 1,236 136 1,057 1,193
Commercial and
Industrial....... 53 688 741 28 551 579 - 397 397
Consumer............. - 703 703 - 760 760 - 846 846
----- ------ ------ ---- ------ ------ ---- ------ ------
Total ........... $ 85 $3,485 $3,570 $ 77 $3,357 $3,434 $136 $2,982 $3,118
===== ====== ====== ==== ====== ====== ==== ====== ======
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Westfield Bank's loan and foreclosed
real estate portfolios and the related allowance for loan losses and valuation
allowance for foreclosed real estate. These agencies, including the FDIC and the
Massachusetts Division of Banks, may require Westfield Bank to adjust the
allowance for loan losses or the valuation allowance for foreclosed real estate
based on their judgments of information available to them at the time of their
examination, thereby adversely affecting Westfield Bank's results of operations.
For the six months ended June 30, 2001, Westfield Bank provided
$600,000 to the allowance for loan losses based on its evaluation of the items
discussed above. Westfield Bank believes that the current allowance for loan
losses accurately reflects the level of risk in the current loan portfolio.
60
Allocation of Allowance for Loan Losses. The following tables set forth
the allowance for loan losses allocated by loan category, the total loan
balances by category, and the percent of loans in each category to total loans
indicated.
At June 30, At December 31,
----------------------------------------------------------------------------------------------------
2001 2000 2000
----------------------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount Balances Category Amount Balances Category Amount Balances Category Amount
of Loan by to Total of Loan by to Total of Loan by to Total of Loan
Loan Category Loss Category Loans Loss Category Loans Loss Category Loans Loss
------------- -------- --------- --------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Real estate - mortgage:
Residential(1) ........... $ 854 $ 215,697 50.74% $ 738 $ 263,935 56.13% $ 859 $ 264,162 56.47% $ 682
Commercial ............... 1,272 93,726 22.04 1,157 91,978 19.56 1,236 92,826 19.84 1,193
Commercial loans ............. 741 48,696 11.46 631 36,421 7.75 579 37,510 8.02 397
Consumer loans(2) ............ 703 67,020 15.76 896 77,877 16.56 760 73,339 15.67 846
-------- --------- ------ ------ --------- ------ ------- -------- ------ -------
Total allowance for loan
losses ................. $ 3,570 $ 425,139 100.00% $3,422 $ 470,211 100.00% $ 3,434 $ 467,837 100.00% $ 3,118
======== ========= ====== ====== ========= ====== ======= ========= ====== =======
At December 31
------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Balances Category Amount Balances Category Amount Balances Category
by to Total of Loan by to Total of Loan by to Total
Category Loans Loss Category Loans Loss Category Loans
-------- -------- -------- --------- --------- -------- -------- --------
(Dollars in thousands)
Real estate - mortgage:
Residential(1) ............ $ 264,883 56.32% $ 675 $254,830 61.03% $ 728 $ 238,951 61.65%61.60%
Commercial ................ 89,333 18.99 1,344 90,026 21.56 1,604 96,151 24.811,940 96,490 24.87
Commercial loans ............. 32,673 6.95 301 25,353 6.07 226229 21,396 5.525.51
Consumer loans(2) ............ 83,442 17.74 312 47,323 11.34 233 31,081 8.02
--------- ------ ------ -------- ------ ------ --------- ------
Total allowance for loan
losses .................. $ 470,331 100.00% $2,632 $417,532 100.00% $2,791$3,130 $ 387,579387,918 100.00%
========= ====== ====== ======== ====== ====== ========= ======
At December 31
-------------------------------
1996
-------------------------------
Percent
of Loans
Loan in Each
Balances Category
Amount of by to Total
Loan Loss Category Loans
--------- -------- --------
Real estate - mortgage:
Residential(1) ............ $ 783 $ 211,626 59.84%59.74%
Commercial ................ 1,637 91,126 25.762,192 91,687 25.88
Commercial loans ............. 375380 18,253 5.165.15
Consumer loans(2) ............ 299300 32,696 9.249.23
------- --------- ------
Total allowance for loan
losses .................. $ 3,0943,655 $ 353,701354,262 100.00%
======= ========= ======
-
-------------------------
(1) Includes home equity loans.
(2) Excludes passbook loans.
61
Investment Activities
The Board of Directors reviews and approves Westfield Bank's investment
policy on an annual basis. The President and Treasurer, as authorized by the
Board, implement this policy based on the established guidelines within the
written policy.
Westfield Bank's investment policy is designed primarily to manage the
interest rate sensitivity of its assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to complement its
lending activities and to provide and maintain liquidity within the range
established by policy. In determining Westfield Bank's investment strategies, it
considers its interest rate sensitivity, yield, credit risk factors, maturity
and amortization schedules, and other characteristics of the securities to be
held.
Massachusetts-chartered savings banks have authority to invest in
various types of assets, including U.S. Treasury obligations, securities of
various federal agencies, mortgage-backed securities, certain certificates of
deposit of insured financial institutions, repurchase agreements, overnight and
short term loans to other banks, corporate debt instruments, and equity
securities.
Securities Portfolio
Westfield Bank classifies securities as held to maturity or available
for sale at the date of purchase. Westfield Bank does not have any securities
classified as trading. Held to maturity securities are reported at cost,
adjusted for amortization of premium and accretion of discount. Available for
sale securities are reported at fair market value. At June 30, 2001, held to
maturity securities totaled $69.2 million, or 28.5%29.1% of the total securities
portfolio, and available for sale investments totaled $168.4 million, or 71.5%70.9%
of Westfield Bank's total securities portfolio. Westfield Bank classifies U.S.
Government securities and U.S. Government Agency securities as available for
sale and held to maturity. These securities predominately have maturities of
less than five years, although Westfield Bank also invests in adjustable rate
securities with maturities of up to 15 years. Westfield Bank's mortgage-backed
securities, which are directly or indirectly insured or guaranteed by Freddie
Mac, Ginnie Mae or Fannie Mae or are rated AAA, consist of both 30-year
securities and seven-year balloon securities. The latter are so named because
they mature (i.e. balloon) prior to completing their normal 30-year
amortization. The 30-year mortgage backed securities are classified as held to
maturity while the seven year balloon securities are classified as available for
sale. In addition, Westfield Bank has investments in Federal Home Loan Bank
stock and other equity securities.
62
Securities Portfolio. The following table sets forth the composition of
Westfield Bank's securities portfolio at the dates indicated.
At June 30, At December 31,
------------------ -------------------------------------------------------------
2001 2000 1999 1998
------------------ ------------------ ------------------- --------------------
Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
Securities:
U.S. Government securities .. $ - $ - $ - $ - $ 4,997 $ 5,007 $ 12,131 $ 12,299
Federal agency securities ... 35,659 36,003 43,188 43,578 35,426 34,878 36,109 45,28736,287
Other debt securities ....... 50,806 51,703 62,352 62,126 48,722 47,982 37,306 37,901
-------- -------- -------- -------- -------- -------- -------- --------
Total securities ............... 86,465 87,706 105,540 105,704 89,145 87,867 85,546 95,48786,487
-------- -------- -------- -------- -------- -------- -------- --------
Mortgage-backed and
mortgage-related securities:
Ginnie Mae .................. 16,152 16,263 9,904 9,907 2,511 2,420 4,302 4,300
Fannie Mae .................. 83,90983,144 84,022 33,729 33,584 22,869 21,915 15,096 15,437
Freddie Mac ................. 17,711 18,004 5,685 5,720 3,650 3,658 7,485 7,653
Collateralized mortgage
obligation ................. 8,838 8,99419,360 19,503 10,016 10,233 - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Total mortgage-backed and
Mortgage-related securities... 126,610 127,283136,367 137,792 59,334 59,444 29,030 27,993 26,883 27,390
-------- -------- -------- -------- -------- -------- -------- --------
Marketable equity securities ... 12,178 12,847 8,063 9,744 6,303 9,194 4,772 6,0816,080
-------- -------- -------- -------- -------- -------- -------- --------
Total securities ........... $225,253 $227,836$235,010 $238,345 $172,937 $174,892 $124,478 $125,054 $117,201 $119,957
======== ======== ======== ======== ======== ======== ======== ========
63
Mortgage-Backed Securities and Mortgage-Related Securities. The
following table sets for the amortized cost and fair value of Westfield Bank's
mortgage-backed and mortgage-related securities, which are classified as
available for sale or held to maturity at the dates indicated.
As of June 30, At December 31,
------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
Amortized Percent Market Amortized Percent of Market Amortized Percent of Market
Cost of Total Value Cost Total Value Cost Total Value
-------- ------ -------- ------- ------ ------- ------- ------ -------
(Dollars in thousands)
Mortgage-backed and mortgage-related
securities available for sale:
Ginnie Mae ............................. $ 9,447 6.89% $ 9,563 $8,610$ 8,610 14.51% $8,644 $1,634$ 8,644 $ 1,634 5.63% $ 1,580
Fannie Mae ............................. 75,68974,924 55.19 75,676 29,174 49.17 28,933 20,790 71.62 19,889
Freddie Mac ............................ 4,587 3.34 4,734 4,728 7.97 4,770 2,099 7.23 2,099
Other ..................................Collateralized mortgage obligation ..... 8,838 6.44 8,994 10,016 16.88 10,233 - - -
-------- ------ -------- ------- ------------- ------- ------- ------ -------
Total mortgage-backed and mortgage
related securities available for
sale .............................. 98,56197,796 71.87 98,967 52,528 88.53 52,580 24,523 84.47 23,568
-------- ------ -------- ------- ------------- ------- ------- ------ -------
Mortgage-back and mortgage related
securities held to maturity:
Ginnie Mae ............................. 6,705 4.89 6,700 1,294 2.18 1,263 877 3.02 840
Fannie Mae ............................. 8,220 5.99 8,345 4,555 7.68 4,651 2,079 7.16 2,026
Freddie Mac ............................ 13,124 9.57 13,269 957 1.61 950 1,551 5.34 1,559
Collateralized mortgage obligation ..... 10,522 7.72 10,509 - - - - - -
Total mortgage-backed and mortgage
related securities held to maturity . 28,049 20.45 28,31438,571 28.28 38,823 6,806 11.47 6,864 4,507 15.53 4,425
-------- ------ -------- ------- ------------- ------- ------- ------ -------
Total mortgage-backed and mortgage
related securities .................. $137,132$136,367 100.00% $127,281$137,792 $59,334 100.00% $59,444 $29,030 100.00% $27,993
======== ====== ======== ======= ============= ======= ======= ====== =======
64
Securities Portfolio Maturities. The composition and maturities of the
securities portfolio (debt securities) and the mortgage-backed securities
portfolio at June 30, 2001 are summarized in the following table. Maturities are
based on the final contractual payment dates, and do not reflect the impact of
prepayments or redemptions that may occur.
More than One Year More than Five Years
One Year or Less through Five Years through Ten Years
---------------------- ------------------------- -----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
-------- ---- -------- ---- ------- ----
(Dollars in thousands)
Securities available for sale:
U.S. Government securities ........ $ - -% $ - -% $ - -%
Federal agency securities ......... 1,000 6.78 14,041 6.37 1,546 6.95
Other debt securities ............. 7,490 6.68 22,788 6.42 1,000 7.73
-------- -------- -------
Total securities ............... 8,490 6.69 36,829 6.40 2,546 7.26
-------- -------- -------
Mortgage-backed securities available
for sale:
Ginnie Mae ........................ - - - - - -
Fannie Mae ........................ - - 258 6.00 - -
Freddie Mac ....................... - - 309308 6.00 - -
Other mortgage-backed securities ..Collateralized mortgage obligation - - - - - -
-------- -------- -------
Total mortgage-back securities . - - 566 6.00 - -
-------- -------- -------
Total ............................. 8,490 6.69 37,395 6.39 2,546 7.26
======== ======== =======
Securities held to maturity:
U.S. Government securities ........ - - - - - -
Federal agency securities ......... 7,008 5.65 6,998 6.30 - -
Other debt securities ............. 6,033 7.20 10,478 6.90 139 5.68
-------- -------- -------
Total investment securities .... 13,041 6.37 17,476 6.66 139 5.68
-------- -------- -------
Mortgage-backed securities held to
maturity:
Ginnie Mae ........................ - - 3082 8.00 1,056 6.121,004 6.02
Fannie Mae ........................ - - - - 1,716 6.90
Freddie Mac ....................... 48 7.50 373 7.50 - -
Other mortgage-backed securities ..Collateralized mortgage obligation - - - - - -
-------- -------- -------
Total mortgage-backed
securities .................. 48 7.50 402 7.54 2,773 6.60455 6.63 2,720 6.57
-------- -------- -------
Total ............................. $ 13,089 6.37 $ 17,878 6.6817,931 7.59 $ 2,912 6.552,859 6.53
======== ======== =======
More than Ten Years Total Securities
------------------------ ---------------------------------
Weighted Weighted
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
------- ---- -------- ------- ----
(Dollars in thousands)
Securities available for sale:
U.S. Government securities ........ $ - -% $ - $ - -%
Federal agency securities ......... 5,0655,066 6.08 21,653 21,860 6.36
Other debt securities ............. 2,878 6.96 34,156 34,707 6.56
------- -------- -------
Total securities ............... 7,944 6.40 55,809 56,567 6.48
------- -------- -------
Mortgage-backed securities available
for sale:
Ginnie Mae ........................ 9,447 6.57 9,447 9,563 6.57
Fannie Mae ........................ 75,43174,666 6.49 75,689 75,67674,924 75,677 6.48
Freddie Mac ....................... 4,2784,279 6.92 4,587 4,7344,735 6.86
Other mortgage-backed securities .. 8,838 6.88 8,838 8,994 6.88
------- -------- -------
Total mortgage-back securities . 97,99597,230 6.55 98,56197,796 98,969 6.54
------- -------- -------
Total ............................. 105,938105,174 6.54 154,370 155,535153,605 155,536 6.52
======= ======== =======
Securities held to maturity:
U.S. Government securities ........ - - - - -
Federal agency securities ......... - - 14,006 14,143 5.98
Other debt securities ............. - - 16,650 16,99716,996 7.00
------- -------- -------
Total investment securities .... - - 30,656 31,139 6.53
------- -------- -------
Mortgage-backed securities held to
maturity:
Ginnie Mae ........................ 5,619 7.57 6,705 6,700 7.34
Fannie Mae ........................ 6,504 6.29 8,220 8,345 6.42
Freddie Mac ....................... 12,703 6.74 13,124 13,269 6.76
Other mortgage-backed securities .. 10,522 6.68 10,522 10,509 6.68
------- -------- -------
Total mortgage-backed
securities .................. 35,348 6.77 38,571 38,823 6.77
------- -------- -------
Total ............................. $35,348 6.77 $ 69,227 $69,962 6.66
======= ======== =======
65
Sources of Funds
General. Deposits, scheduled amortization and prepayments of loan
principal, maturities and calls of investments securities and funds provided by
operations are Westfield Bank's primary sources of funds for use in lending,
investing and for other general purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Deposits. Westfield Bank offers a variety of deposit accounts having a
range of interest rates and terms. Westfield Bank currently offers regular
savings deposits (consisting of passbook and statement savings accounts),
interest-bearing demand accounts, noninterest-bearing demand accounts, money
market accounts and time deposits. Westfield Bank has expanded the types of
deposit products that it offers to include jumbo certificates of deposit, tiered
money market accounts and customer repurchase agreements to compliment its
increased emphasis on attracting commercial banking relationships.
Deposit flows are influenced significantly by general and local
economic conditions, changes in prevailing interest rates, pricing of deposits
and competition. Westfield Bank's deposits are primarily obtained from areas
surrounding our offices. Westfield Bank relies primarily on paying competitive
rates, service and long-standing relationships with customers to attract and
retain these deposits. Westfield Bank does not use brokers to obtain deposits.
When Westfield Bank determines its deposit rates, it considers local
competition, U.S. Treasury securities offerings and the rates charged on other
sources of funds. Core deposits (defined as regular accounts, money market
accounts, NOW accounts and demand accounts) represented 40.4% of total deposits
on June 30, 2001 and 38.1% on December 31, 2000. At June 30, 2001 and December
31, 2000, time deposits with remaining terms to maturity of less than one year
amounted to $264.1 million and $281.5 million, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Net
Interest and Dividend Income" for information relating to the average balances
and costs of Westfield Bank's deposit accounts for the six months ended June 30,
2001 and 2000 and years ended December 31, 2000, 1999 and 1998.
66
Deposit Distribution Weighted Average. The following table sets forth
the distribution of Westfield Bank's deposit accounts, by account type, at the
dates indicated.
At June 30, 2001 At December 31,
- ------------------------------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------
Weighted Weighted
Average Average
Amount Percent Rates Amount Percent Rates Amount Percent
----------------------------------------------------------------------------------
(Dollars in thousands)
Demand deposits (1) .......... $ 45,599 7.45% 0.00% $ 38,500 6.40% 0.00% $ 29,591 5.36%
NOW deposits ................. 37,097 6.06 2.41 34,519 5.73 2.37 34,029 6.18
Regular accounts ............. 42,797 6.99 1.05 42,348 7.04 1.07 50,285 9.13
Money market accounts ........ 121,957 19.92 3.17 113,787 18.90 3.74 113,561 20.61
--------- ---- --------- ---- --------- -----
Total non-certificated
accounts ............... 247,450 40.42 2.07 229,154 38.07 2.41 227,466 41.28
--------- ---- --------- ---- --------- -----
Time certificates of deposit
Due within 1 year ......... 264,142 43.15 5.26 281,461 46.76 5.76 206,322 37.44
Over 1 year through 3 years 98,234 16.05 5.52 90,740 15.08 5.94 116,822 21.20
Over 3 years .............. 2,336 0.38 5.17 541 0.09 5.58 414 0.08
--------- ---- --------- ---- --------- -----
Total certificated
accounts ............ 364,712 59.58 5.33 372,742 61.93 5.79 323,558 58.72
--------- ---- --------- ---- --------- -----
Total ........................ $ 612,162 100.00% 4.06 $ 601,896 100.00% 4.51 $ 551,024 100.00%
========= ====== ========= ====== ========= ======
At December 31,
- -----------------------------------------------------------------------------
1998
-
-----------------------------------------------------------------------------
Weighted Weighted
Average Average
Rates Amount Percent Rates
-
-----------------------------------------------------------------------------
Demand deposits (1) ........... 0.00% $ 23,085 4.54% 0.00%
NOW deposits .................. 2.21 30,884 6.07 1.96
Regular accounts .............. 1.06 49,793 9.80 2.53
Money market accounts ......... 3.34 124,189 24.43 3.20
-------- -----
Total non-certificated
accounts ............... 2.28 227,951 44.84 2.56
-------- -----
Time certificates of deposit
Due within 1 year .......... 4.90 194,006 38.17 5.09
Over 1 year through 3 years 5.54 84,864 16.70 5.64
Over 3 years ............... 4.95 1,492 0.29 5.34
-------- -----
Total certificated
accounts ............. 5.13 280,362 55.16 5.29
-------- -----
Total ......................... 3.94 $ 508,313 100.00% 4.07
========= ======
- ------------------------------
(1) Includes mortgagor's escrow payments.
67
C.D. Maturities. At June 30, 2001, Westfield Bank had $71.7 million in
time certificates of deposits with balances of $100,000 and over maturing as
follow:
Weighted
Average
Maturity Period Amount Rate
-
--------------------------------------------------- ---------------------------- ---------------------
(Dollars in thousands)
Three months or less .......................... $ 18,452 5.32%
Over three months through six months .......... 10,737 4.80
Over six months through 12 months ............. 19,439 5.24
Over 12 months ................................ 23,024 5.78
---------
Total ..................................... $ 71,652 5.37
=========
C.D. Balances by Rates. The following table sets forth, by interest
rate ranges, information concerning Westfield Bank's time certificates of
deposit at the dates indicated.
At June 30, 2001
-----------------------------------------------------------------------------------------------------
Period to Maturity
-----------------------------------------------------------------------------------------------------
More than
Less than One to Two Two to Three Percent of
One Year Years Three Years Years Total Total
----------------- --------------- ----------------- -------------- ----------------- ----------------
(Dollars in thousands)
4.00% and below $ 10,952 $ - $ - $ - $ 10,952 3.00%
4.01% to 5.00% 122,134 23,507 7,328 576 153,545 42.10
5.01% to 6.00% 53,401 32,112 14,861 1,760 102,134 28.00
6.01% to 7.00% 77,655 15,991 4,435 - 98,081 26.90
-------- --------- --------- -------- --------- ------
Total $264,142 $ 71,610 $ 26,624 $ 2,336 $ 364,712 100.00%
======== ========= ========= ======== ========= ======
Borrowings. In addition to deposits, borrowings from the Federal Home
Loan Bank are available as an additional source of funds to finance Westfield
Bank's lending and investing activities. Westfield Bank traditionally has not
relied upon borrowings from the Federal Home Loan Bank. However, in 1999,
Westfield Bank borrowed $5.0 million from the Federal Home Loan Bank to meet
increased liquidity demand for Year 2000 purposes.
68
Properties
Westfield Bank currently conducts its business through its ten banking
offices and two off-site ATMs. As of June 30, 2001, the properties and leasehold
improvements owned by us had an aggregate net book value of $13.4 million.
Year of Lease
or License Deposits as of
Location Ownership Year Opened Expiration June 30, 2001
-------- ------------------ ------------------- ---------------- -----------------------
Main Office: (In thousands)
141 Elm St Owned 1964 N/A $ 206,927
Westfield, MA
Branch Offices:
206 Park St Owned 1957 N/A 123,678
W. Springfield, MA
655 Main St. Owned 1968 N/A 129,911
Agawam, MA
26 Arnold St. Owned 1976 N/A 1,767
Westfield, MA
300 Southampton Rd. Owned 1987 N/A 45,454
Westfield, MA
462 College Highway Owned 1990 N/A 33,490
Southwick, MA
382 N. Main St. Leased 1997 2007(1) 51,376
E. Longmeadow, MA
1341 Main St. Leased 19981999 2003(2) 19,115
Springfield, MA
1642 Northampton St. Owned 2001 N/A 299
Holyoke, MA
1342 Liberty St. Owned 2001 N/A 145
Springfield, MA
ATMs:
337 N. Westfield St. Owned 1988 N/A N/A
Feeding Hills, MA
830 Suffield St. Leased 1997 2001 N/A
Agawam, MA
-
------------------------------
(1) Does not include two additional Five-year options.
(2) Does not include three additional Five-year options.
69
Legal Proceedings
Westifeld Bank is not involved in any pending legal proceeding other
than routine legal proceedings occurring in the ordinary course of business.
Westfield Bank believes that these routine legal proceedings, in the aggregate,
are immaterial to its financial condition and results of operation.
Personnel
As of June 30, 2001, Westfield Bank had 142 full-time employees and 25
part-time employees. The employees are not represented by a collective
bargaining unit, and Westfield Bank considers its relationship with its
employees to be excellent.
Subsidiary Activities
After the reorganization, Westfield Financial will have two
subsidiaries: Westfield Bank and Westfield Securities Corp. Westfield Securities
Corp. is a qualified Massachusetts securities corporation formed in October 2001
primarily for the purpose of holding investment securities.
Westfield Bank's only active subsidiary is Elm Street Real Estate
Investments, Inc., a Delaware real estate investment trust that was incorporated
in 1997, primarily for the purpose of acquiring and managing a portfolio of
mortgage-backed securities, loans collateralized by real estate and other
investment securities previously owned by Westfield Bank. Elm Street Real Estate
Investments, Inc. currently holds a majority of Westfield Bank's residential
real estate loans.
Business of Westfield Financial
Westfield Financial has not engaged in any business to date. Upon
completion of the reorganization, Westfield Financial will own Westfield Bank.
Westfield Financial will retain up to 50% of the net proceeds from the stock
offering. We will invest our initial capital as discussed in "How We Intend to
Use the Proceeds from the Stock Offering."
Immediately after consummation of the reorganization and stock
offering, it is expected that the only business activities of Westfield
Financial will be to hold all of the outstanding common stock of Westfield Bank,
to fund a loan to the ESOP from the proceeds of capital raised in the stock
offering, and to contribute 50% of the net proceeds from the stock offering to
Westfield Bank as additional capital. Westfield Financial may use the net
proceeds retained by it to pay dividends to stockholders, to repurchase shares
of its common stock and for general corporate purposes. In the future, however,
Westfield Financial, as the holding company of Westfield Bank, will be
authorized to pursue other business activities permitted by applicable laws and
regulations for such holding companies, which may include the issuance of
additional shares of common stock to raise capital or to support mergers or
acquisitions and borrowing funds for reinvestment in Westfield Bank. There are
no plans for any additional capital issuance, merger or acquisition, or other
diversification of the activities of Westfield Financial at the present time.
Our cash flow will depend upon earnings from the investment of the
portion of net proceeds we retain and any dividends Westfield Financial receives
from Westfield Bank. Initially, Westfield Financial will neither own nor lease
any property, but will instead use the
70
premises, equipment and furniture of Westfield Bank. At the present time, we
intend to employ only persons who are officers of Westfield Bank to serve as
officers of Westfield Financial. However, we will use the support staff of
Westfield Bank from time to time. These persons will not be separately
compensated by Westfield Financial. Westfield Financial will hire additional
employees, as appropriate, to the extent it expands its business in the future.
See "How We Intend to Use the Proceeds from the Stock Offering."
Business of Westfield Mutual Holding Company
Westfield Mutual Holding Company is a Massachusetts-chartered mutual
holding company, formed in 1995 in connection with Westfield Bank's mutual
holding company reorganization. Westfield Mutual Holding Company is a qualified
Massachusetts securities corporation which had $81.4 million total assets as of
June 30, 2001. As part of the reorganization, Westfield Mutual Holding Company
will distribute all of its assets to Westfield Securities Corp., a wholly-owned
subsidiary of Westfield Bank and qualified Massachusetts securities corporation.
After the reorganization and stock offering, the principal assets of Westfield
Mutual Holding Company will be the common stock of Westfield Financial it
receives in the reorganization. At this time, we expect that Westfield Mutual
Holding Company will not engage in any business activity other than its
investment in a majority of the common stock of Westfield Financial.
Massachusetts laws and regulations require that as long as Westfield
Mutual Holding Company is in existence, it must own a majority of Westfield
Financial's common stock. Massachusetts law and regulations permit Westfield
Mutual Holding Company to convert to the stock form of organization. For
additional information regarding a stock reorganization of Westfield Mutual
Holding Company, see "The Reorganization and the Stock Offering - Possible
Conversion of Westfield Mutual Company to Stock Form."
71
Regulation of Westfield Bank,
Westfield Financial and Westfield Mutual Holding Company
General
Westfield Bank is a Massachusetts-chartered savings bank, and its
deposit accounts are insured up to applicable limits by the Bank Insurance Fund
of the FDIC and by the Depositors Insurance Fund. Westfield Bank is subject to
extensive regulation, examination and supervision by the Commonwealth of
Massachusetts Division of Banks as its primary corporate regulator, and by the
FDIC as the deposit insurer. Westfield Bank must file reports with the Division
and the FDIC concerning its activities and financial condition, and it must file
reports with the Division and the FDIC concerning its activities and financial
condition, and it must obtain regulatory approval prior to entering into certain
transactions, such as mergers with, or acquisitions of, other depository
institutions and opening or acquiring branch offices. The Division and the FDIC
conduct periodic examinations to assess Westfield Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which a savings bank can engage and is
intended primarily for the protection of the deposit insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes.
Westfield Financial and Westfield Mutual Holding Company, as the bank
holding companies controlling Westfield Bank, will be subject to the Bank
Holding Company Act of 1956, as amended, and the rules and regulations of the
Federal Reserve Board under the Bank Holding Company Act. Westfield Financial
will also be subject to the provisions of the Massachusetts General Laws
applicable to savings banks and other depository institutions and their holding
companies (the Massachusetts banking laws) and the regulations of the
Massachusetts Division of Banks under the Massachusetts banking laws applicable
to bank holding companies. Westfield Financial and Westfield Mutual Holding
Company will be required to file reports with, and otherwise comply with the
rules and regulations of the Federal Reserve Board and the Division. Westfield
Financial will be required to file reports with, and otherwise comply with, the
rules and regulations of the Securities and Exchange Commission under the
federal securities laws.
Any change in such laws and regulations, whether by the Division, the
FDIC, the Federal Reserve Board, or the Securities and Exchange Commission or
through legislation, could have a material adverse impact on Westfield Financial
and Westfield Bank and their operations and stockholders.
Massachusetts Banking Regulation
Powers. Westfield Bank derives its lending, investment and other
activity powers primarily from the applicable provisions of the Massachusetts
banking laws and its related
72
regulations. Under these laws and regulations, savings banks, including
Westfield Bank, generally may invest in:
o real estate mortgages;
o consumer and commercial loans;
o specific types of debt securities, including certain corporate
debt securities and obligations of federal, state and
local governments and agencies;
o certain types of corporate equity securities; and
o certain other assets.
A savings bank may also:
o invest pursuant to a "leeway" power that permits investments
not otherwise permitted by the Massachusetts banking laws.
"Leeway" investments must comply with a number of limitations
on the individual and aggregate amounts of "leeway"
investments;
o exercise trust powers upon approval of the Division; and
o exercise certain powers and engage in certain activities
permissible for national banks in accordance with regulations
adopted by the Division with respect to such power or
activity.
The exercise of these lending, investment and activity powers are
limited by federal law and the related regulations. See "- Federal Banking
Regulation - Activity Restrictions on State-Chartered Banks" below.
Community Reinvestment Act. Westfield Bank is also subject to
provisions of the Massachusetts banking laws that, like the provisions of the
federal Community Reinvestment Act, impose continuing and affirmative
obligations upon a banking institution organized in Massachusetts to serve the
credit needs of its local communities. The obligations of the Massachusetts
Community Reinvestment Act are similar to those imposed by the federal Community
Reinvestment Act with the exception of the assigned exam ratings. Massachusetts
banking law provides for an additional exam rating of "high satisfactory" in
addition to the federal Community Reinvestment Act ratings of "outstanding,"
"satisfactory," "needs to improve" and "substantial noncompliance." The Division
has adopted regulations to implement the Massachusetts Community Reinvestment
Act that are based on the federal Community Reinvestment Act. See "Federal
Banking Regulation - Community Reinvestment Act." The Division is required to
consider a bank's Massachusetts Community Reinvestment Act rating when reviewing
the bank's application to engage in certain transactions, including mergers,
asset purchases and the establishment of branch offices or automated teller
machines, and provides that such assessment may serve as a basis for the denial
of any such application. The Massachusetts Community Reinvestment Act requires
the Division to assess a bank's compliance with the Massachusetts Community
Reinvestment Act and to make such assessment
73
available to the public. Westfield Bank's latest Massachusetts Community
Reinvestment Act rating, received by letter, dated July 8, 1999, from the
Division was a rating of "satisfactory."
Loans-to-One-Borrower Limitations. With specified exceptions, the total
obligations of a single borrower to a Massachusetts chartered savings bank may
not exceed 20% of the savings bank's retained earnings account. A savings bank
may lend additional amounts up to 100% of the bank's retained earnings account
if secured by collateral meeting the requirements of the Massachusetts banking
laws. Westfield Bank currently complies with applicable loans-to-one-borrower
limitations.
Loans to a Bank's Insiders. The Massachusetts banking laws prohibit any
officer, director or trustee from borrowing, otherwise becoming indebted, or
becoming liable for a loan or other extension of credit by such bank to any
other person, except for any of the following loans or extensions of credit:
o loan or extension of credit, secured or unsecured, to an
officer of the bank in an amount not exceeding $20,000;
o loan or extension of credit intended or secured for
educational purposes to an officer of the bank in an amount
not exceeding $75,000; and
o loan or extension of credit secured by a mortgage on
residential real estate to be occupied in whole or in part by
the officer to whom the loan or extension of credit is made,
in an amount not exceeding $275,000; and
o loan or extension of credit to a director or trustee of the
bank who is not also an officer of the bank in an amount
permissible under the bank's loan-to-one borrower limit. See
"- Loans-to-One Borrower Limitations" above.
The loans listed above require approval of the majority of the members
of Westfield Bank's executive committee, excluding any member involved in the
loan or extension of credit. No such loan or extension of credit may be granted
with an interest rate or other terms that are preferential in comparison to
loans granted to persons not affiliated with the savings bank.
Dividends. Under the Massachusetts banking laws, a stock savings bank
may, subject to several limitations, declare and pay a dividend on its capital
stock out of the bank's net profits. A dividend may not be declared, credited or
paid by a stock savings bank so long as there is any impairment of capital
stock. No dividend may be declared on the bank's common stock for any period
other than for which dividends are declared upon preferred stock, except as
authorized by the Commissioner. The approval of the Commissioner is also
required for a stock savings bank to declare a dividend, if the total of all
dividends declared by the savings bank in any calendar year shall exceed the
total of its net profits for that year combined with its retained net profits of
the preceding two years, less any required transfer to surplus or a fund for the
retirement of any preferred stock.
In addition, federal law may also limit the amount of dividends that
may be paid by Westfield Bank. See "- Federal Banking Regulation - Prompt
Corrective Action."
74
Examination and Enforcement. The Division is required to periodically
examine savings banks at least once every calendar year or at least once each
18-month period if the savings bank qualifies as well capitalized under the
prompt corrective action provisions of the Federal Deposit Insurance Act. See "-
Federal Banking Regulation - Prompt Corrective Action." The Division may also
examine a savings bank whenever the Division deems an examination expedient. If
the Division finds, after an inquiry, that any trustee, director or officer of a
savings bank has, among other things, violated any law related to such bank or
has conducted the business of such bank in an unsafe or unsound manner, the
Division may take various actions that could result in the suspension or removal
of such person as an officer, director or trustee of the savings bank. If the
Division determines that, among other things, a savings bank has violated its
charter or any Massachusetts law or is conducting its business in an unsafe or
unsound manner or is in an unsafe or unsound condition to transact is banking
business, the Division may take possession of the property and business of the
savings bank and may, if the facts warrant, initiate the liquidation of the
bank.
Federal Banking Regulation
Capital Requirements. FDIC regulations require banks whose deposits are
insured by the Bank Insurance Fund, such as Westfield Bank, to maintain minimum
levels of capital. The FDIC regulations define two tiers, or classes, of
capital.
Tier 1 capital is comprised of the sum of:
o common stockholders' equity, excluding the unrealized
appreciation or depreciation, net of tax, from
available-for-sale securities;
o non-cumulative perpetual preferred stock, including any
related retained earnings; and
o minority interests in consolidated subsidiaries minus all
intangible assets, other than qualifying servicing rights and
any net unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include:
o cumulative perpetual preferred stock;
o certain perpetual preferred stock for which the dividend rate
may be reset periodically;
o mandatory convertible securities;
o subordinated debt;
o intermediate preferred stock;
o allowance for possible loan losses; and
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o up to 45% of pretax net unrealized holding gains on available
for sale equity securities with readily determinable fair
market values.
Allowance for possible loan losses includible in Tier 2 capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital
that may be included in total capital can not exceed 100% of Tier 1 capital.
The FDIC regulations establish a minimum leverage capital requirement
for banks in the strongest financial and managerial condition, with a rating of
1 (the highest examination rating of the FDIC for banks) under the Uniform
Financial Institutions Rating System, of not less than a ratio of 3.0% of Tier 1
capital to total assets. For all other banks, the minimum leverage capital
requirement is 4.0%, unless a higher leverage capital ratio is warranted by the
particular circumstances or risk profile of the depository institution.
The FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance of a
ratio of total capital, which is defined as the sum of Tier 1 capital and Tier 2
capital, to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include:
o the quality of the bank's interest rate risk management
process;
o the overall financial condition of the bank; and
o the level of other risks at the bank for which capital is
needed.
Institutions with significant interest rate risk may be required to
hold additional capital. The agencies also issued a joint policy statement
providing guidance on interest rate risk management, including a discussion of
the critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
The following table shows ourleverage ratio, our Tier 1 risk-based
capital ratio, and our total risk-based capital ratio, at June 30, 2001:
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As of June 30, 2001
------------------------------------------------------------------------------
Percent Pro Percent Pro Forma Percent
Historical of Forma of Capital of
Capital Assets(1) Capital(2) Assets(1) Requirements Assets(2)
------------ ----------- ----------- ------------ --------------- ------------
(In thousands)
Regulatory Tier 1 leverage capital .. $79,258 11.21% $92,728 12.81% $28,948 4.00%
Tier 1 risk-based capital ........... $79,258 17.38% $92,728 12.81% $18,668 4.00%
Total risk-based capital ............ $83,139 18.23% $96,609 20.70% $37,336 8.00%
- --------------------------
(1) For purposes of calculating Regulatory Tier 1 leverage capital, assets are
based on adjusted total leverage assets. In calculating Tier 1 risk based
capital and total risk-based capital, assets are based on total
risk-weighted assets.
(2) Assumes the sale of 3,760,000 common stock in the stock offering.
As the table shows, as of June 30, 2001, Westfield Bank exceeded the minimum capital
adequacy requirements at the date indicated.was considered
"well capitalized" under FDIC guidelines.
Activity Restrictions on State-Chartered Banks. Section 24 of the
Federal Deposit Insurance Act, as amended, which was added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDIC Improvement Act),
generally limits the activities as principal and investments of state-chartered
FDIC insured banks and their subsidiaries to those permissible for federally
chartered national banks and their subsidiaries, unless such activities and
investments are specifically exempted by Section 24 or consented to by the FDIC.
Section 24 provides an exception for investments by a bank in common
and preferred stocks listed on a national securities exchange or the shares of
registered investment companies if:
o the bank held such types of investments during the 14-month
period from December 31, 1990 through November 26, 1991;
o the state in which the bank is chartered permitted such
investments as of December 31, 1991; and
o the bank notifies the FDIC and obtains approval from the FDIC
to make or retain such investments. Upon receiving such FDIC
approval, an institution's investment in such equity
securities will be subject to an aggregate limit up to the
amount of its Tier 1 capital.
Westfield Bank received approval from the FDIC to retain and acquire
such equity investments subject to a maximum permissible investment equal to the
lesser of 100% of Westfield Bank's Tier 1 capital or the maximum permissible
amount specified by the Massachusetts banking laws. Section 24 also provides an
exception for majority owned subsidiaries of a bank, but Section 24 limits the
activities of such subsidiaries to those permissible for a national bank,
permissible under Section 24 of the Federal Deposit Insurance Act and the
related FDIC regulations, or as approved by the FDIC.
Before making a new investment or engaging in a new activity that is
not permissible for a national bank or otherwise permissible under Section 24 of
the FDIC regulations, an insured bank must seek approval from the FDIC to make
such investment or engage in such activity. The FDIC will not approve the
activity unless the bank meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the FDIC
77
insurance funds. Certain activities of subsidiaries that are engaged in
activities permitted for national banks only through a "financial subsidiary"
are subject to additional restrictions.
Enforcement. The FDIC has extensive enforcement authority over insured
savings banks, including Westfield Bank. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue cease
and desist orders and to remove directors and officers. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The FDIC is required, with some exceptions, to appoint a receiver or
conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events,
including:
o insolvency, or when the assets of the bank are less than its
liabilities to depositors and others;
o substantial dissipation of assets or earnings through
violations of law or unsafe or unsound practices;
o existence of an unsafe or unsound condition to transact
business;
o likelihood that the bank will be unable to meet the demands of
its depositors or to pay its obligations in the normal course
of business; and
o insufficient capital, or the incurring or likely incurring of
losses that will deplete substantially all of the
institution's capital with no reasonable prospect of
replenishment of capital without federal assistance.
Deposit Insurance. Pursuant to FDIC Improvement Act, the FDIC
established a system for setting deposit insurance premiums based upon the risks
a particular bank or savings association posed to its deposit insurance funds.
Under the risk-based deposit insurance assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending six months before the
assessment period. The three capital categories are (1) well capitalized, (2)
adequately capitalized and (3) undercapitalized. With respect to the capital
ratios, institutions are classified as well capitalized, adequately capitalized
or undercapitalized using ratios that are substantially similar to the prompt
corrective action capital ratios discussed below. The FDIC also assigns an
institution to supervisory subgroup based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds, which may include information
provided by the institution's state supervisor.
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications, or
combinations of capital groups and supervisory subgroups, to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range
78
from 0 basis points to 27 basis points. The capital and supervisory subgroup
to which an institution is assigned by the FDIC is confidential and may
not be disclosed. A bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of insured institutions, including Westfield Bank.
Under the Deposit Insurance Funds Act of 1996, the assessment base for
the payments on the bonds issued in the late 1980's by the Financing Corporation
to recapitalize the now defunct Federal Savings and Loan Insurance Corporation
was expanded to include, beginning January 1, 1997, the deposits of institutions
insured by the Bank Insurance Fund, such as Westfield Bank. The annual rate of
assessments for the payments on the Financing Corporation bonds for the
quarterly period beginning on July 1, 2001 was .0188% for Bank Insurance
Fund-assessable deposits and .0188% for Savings Association Insurance
Fund-assessable deposits.
Under the Federal Deposit Insurance Act, the FDIC may terminate the
insurance of an institution's deposits upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. The management of Westfield Bank does not know
of any practice, condition or violation that might lead to termination of
deposit insurance.
Transactions with Affiliates of Westfield Bank. Transactions between an
insured bank, such as Westfield Bank, and any of its affiliates is governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any
company or entity that controls, is controlled by or is under common control
with the bank. Currently, a subsidiary of a bank that is not also a depository
institution is not treated as an affiliate of the bank for purposes of Sections
23A and 23B, but the Federal Reserve Board has proposed a comprehensive
regulation implementing Sections 23A and 23B, which would establish certain
exceptions to this policy.
Section 23A:
o limits the extent to which the bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such bank's capital stock and retained
earnings, and limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and
retained earnings; and
o requires that all such transactions be on terms that are
consistent with safe and sound banking practices.
The term "covered transaction" includes the making of loans, purchase
of assets, issuance of guarantees and other similar types of transactions.
Further, most loans by a bank to any of its affiliates must be secured by
collateral in amounts ranging from 100 to 130 percent of the loan amounts. In
addition, any covered transaction by a bank with an affiliate and any purchase
of assets or services by a bank from an affiliate must be on terms that are
substantially the same, or at least as favorable to the bank, as those that
would be provided to a non-affiliate.
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Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. ss. 1972 on certain tying arrangements. A depository
institution is prohibited, subject to some exceptions, from extending credit to
or offering any other service, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some
additional service from the institution or its affiliates or not obtain services
of a competitor of the institution.
Uniform Real Estate Lending Standards. Under the FDIC Improvement Act,
the federal banking agencies adopted uniform regulations prescribing standards
for extensions of credit that are secured by liens on interests in real estate
or made for the purpose of financing the construction of a building or other
improvements to real estate. Under the joint regulations adopted by the federal
banking agencies, all insured depository institutions must adopt and maintain
written policies that establish appropriate limits and standards for extensions
of credit that are secured by liens or interests in real estate or are made for
the purpose of financing permanent improvements to real estate. These policies
must establish loan portfolio diversification standards, prudent underwriting
standards, including loan-to-value limits, that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies that have been adopted
by the federal bank regulators.
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits:
o for loans secured by raw land, the supervisory loan-to-value
limit is 65% of the value of the collateral;
o for land development loans, or loans for the purpose of
improving unimproved property prior to the erection of
structures, the supervisory limit is 75%;
o for loans for the construction of commercial, multi-family or
other non-residential property, the supervisory limit is 80%;
o for loans for the construction of one- to four-family
properties, the supervisory limit is 85%; and
o for loans secured by other improved property, for example,
farmland, completed commercial property and other
income-producing property including non-owner occupied, one-
to four-family property, the limit is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one-to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
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Westfield Bank has established, however, internal loan-to-value limits
for real estate loans that are more stringent than the maximum limits currently
imposed under federal law.
Community Reinvestment Act. Under the Community Reinvestment Act, any
insured depository institution, including Westfield Bank, has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community. The Community Reinvestment
Act requires the FDIC, in connection with its examination of a savings bank, to
assess the depository institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications by such institution, including applications for additional branches
and acquisitions.
Among other things, the current Community Reinvestment Act regulations
replace the prior process-based assessment factors with a new evaluation system
that rates an institution based on its actual performance in meeting community
needs. In particular, the current evaluation system focuses on three tests:
o a lending test, to evaluate the institution's record of making
loans in its service areas;
o an investment test, to evaluate the institution's record of
investing in community development projects, affordable
housing, and programs benefiting low or moderate income
individuals and businesses; and
o a service test, to evaluate the institution's delivery of
services through its branches, ATMs and other offices.
The Community Reinvestment Act requires the FDIC to provide a written
evaluation of an institution's Community Reinvestment Act performance utilizing
a four-tiered descriptive rating system and requires public disclosure of an
institution's Community Reinvestment Act rating. Westfield Bank received a
"satisfactory" rating in its Community Reinvestment Act examination conducted by
the FDIC on December 14, 1998.
Safety and Soundness Standards. Pursuant to the requirements of FDIC
Improvement Act, as amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, each federal banking agency, including the FDIC, has
adopted guidelines establishing general standards relating to internal controls,
information and internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, asset quality, earnings, and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director, or principal stockholder.
81
In addition, the FDIC adopted regulations to require a bank that is
given notice by the FDIC that it is not satisfying any of such safety and
soundness standards to submit a compliance plan to the FDIC. If, after being so
notified, a bank fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the FDIC may issue an
order directing corrective and other actions of the types to which a
significantly undercapitalized institution is subject under the "prompt
corrective action" provisions of FDIC Improvement Act. If a bank fails to comply
with such an order, the FDIC may seek to enforce such an order in judicial
proceedings and to impose civil monetary penalties.
Prompt Corrective Action. The FDIC Improvement Act also established a
system of prompt corrective action to resolve the problems of undercapitalized
institutions. The FDIC, as well as the other federal banking regulators, adopted
regulations governing the supervisory actions that may be taken against
undercapitalized institutions. The regulations establish five categories,
consisting of "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." The FDIC's
regulations defines the five capital categories as follows:
An institution will be treated as "well capitalized" if:
o its ratio of total capital to risk-weighted assets is at least
10%;
o its ratio of Tier 1 capital to risk-weighted assets is at
least 6%; and
o its ratio of Tier 1 capital to total assets is at least 5%,
and it is not subject to any order or directive by the FDIC to
meet a specific capital level.
An institution will be treated as "adequately capitalized" if:
o its ratio of total capital to risk-weighted assets is at least
8%;
o its ratio of Tier 1 capital to risk-weighted assets is at
least 4%; and
o its ratio of Tier 1 capital to total assets is at least 4% (3%
if the bank receives the highest rating under the Uniform
Financial Institutions Rating System) and it is not a
well-capitalized institution.
An institution will be treated as "undercapitalized" if:
o its total risk-based capital is less than 8%;
o its Tier 1 risk-based-capital is less than 4%; or
o its leverage ratio is less than 4% (or less than 3% if the
institution is rated a composite "1" under the Uniform
Financial Institutions Rating System).
An institution will be treated as "significantly undercapitalized" if:
o its total risk-based capital is less than 6%;
82
o its Tier 1 capital is less than 3%; or
o its leverage ratio is less than 3%.
An institution that has a tangible capital to assets ratio equal to or
less than 2% would be deemed to be "critically undercapitalized."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as a bank's capital decreases
within the three undercapitalized categories. All banks are prohibited from
paying dividends or other capital distributions or paying management fees to any
controlling person if, following such distribution, the bank would be
undercapitalized. The FDIC is required to monitor closely the condition of an
undercapitalized bank and to restrict the growth of its assets. An
undercapitalized bank is required to file a capital restoration plan within 45
days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent
holding company. The aggregate liability of a parent holding company is limited
to the lesser of:
o an amount equal to the five percent of the bank's total assets
at the time it became "undercapitalized," and
o the amount that is necessary (or would have been necessary) to
bring the bank into compliance with all capital standards
applicable with respect to such bank as of the time it fails
to comply with the plan.
If a bank fails to submit an acceptable plan, it is treated as if it
were "significantly undercapitalized." Banks that are significantly or
critically undercapitalized are subject to a wider range of regulatory
requirements and restrictions.
The FDIC has a broad range of grounds under which it may appoint a
receiver or conservator for an insured depositary bank. If one or more grounds
exist for appointing a conservator or receiver for a bank, the FDIC may require
the bank to issue additional debt or stock, sell assets, be acquired by a
depository bank holding company or combine with another depository bank. Under
the FDIC Improvement Act, the FDIC is required to appoint a receiver or a
conservator for a critically undercapitalized bank within 90 days after the bank
becomes critically undercapitalized or to take such other action that would
better achieve the purposes of the prompt corrective action provisions. Such
alternative action can be renewed for successive 90-day periods. However, if the
bank continues to be critically undercapitalized on average during the quarter
that begins 270 days after it first became critically undercapitalized, a
receiver must be appointed, unless the FDIC makes findings that the bank is
viable.
Loans to a Bank's Insiders. A bank's loans to its executive officers,
directors, any owner of 10% or more of its stock (each, an "insider") and any
entities affiliated with an insider are subject to the conditions and
limitations imposed by Section 22(h) of the Federal Reserve Act and the Federal
Reserve Board's Regulation O. Under these restrictions, the aggregate amount of
the loans to any insider and any entities affiliated with such insider may not
exceed the loans-to-one-borrower limit applicable to national banks, which is
comparable to the loans-to-one-borrower limit applicable to Westfield Bank's
loans. See "-- Massachusetts
83
Banking Regulation - Loans-to-One Borrower Limitations." All loans by a
bank to all insiders and their affiliates in the aggregate may not exceed the
bank's unimpaired capital and unimpaired retained earnings. With some
exceptions, loans to an executive officer, other than loans for the education of
the officer's children and certain loans secured by the officer's residence, may
not exceed the lesser of (1) $100,000 or (2) the greater of $25,000 or 2.5% of
the bank's capital and unimpaired retained earnings. Regulation O also requires
that any proposed loan to an insider or the insider's affiliates be approved in
advance by a majority of the Board of Directors of the bank, with any interested
director not participating in the voting, if such loan, when aggregated with any
existing loans to that insider and that insider's affiliates, would exceed
either (1) $500,000 or (2) the greater of $25,000 or 5% of the bank's unimpaired
capital and retained earnings. Generally, such loans must be made on
substantially the same terms as, and follow credit underwriting procedures that
are not less stringent than, those that are prevailing at the time for
comparable transactions with other persons. An exception is made for extensions
of credit made pursuant to a benefit or compensation plan of a bank that is
widely available to employees of the bank and that does not give any preference
to insiders of the bank over other employees of the bank.
In addition, provisions of the Bank Holding Company Act prohibit
extensions of credit to a bank's insiders and their affiliates by any other
institution that has a correspondent banking relationship with the bank, unless
such extension of credit is on substantially the same terms as those prevailing
at the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
Federal Reserve System
Under Federal Reserve Board regulations, Westfield Bank is required to
maintain noninterest-earning reserves against its transaction accounts. The
Federal Reserve Board regulations generally require that reserves of 3% must be
maintained against aggregate transaction accounts of $42.8$37.3 million or less,
subject to adjustment by the Federal Reserve Board, and an initial reserve of
$1.284 million plus 10%, subject to adjustment by the Federal Reserve Board
between 8% and 14%, against that portion of total transaction accounts in excess
of $42.8 million. The first $5.5 million of otherwise reservable balances,
subject to adjustments by the Federal Reserve Board, are exempted from the
reserve requirements. Westfield Bank is in compliance with these requirements.
Because required reserves must be maintained in the form of either vault cash, a
noninterest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve Board, the effect of this reserve requirement
is to reduce Westfield Bank's interest-earning assets.
Holding Company Regulation
Federal Regulation. After the reorganization, both Westfield Financial
and Westfield Mutual Holding Company will be regulated as a bank holding
companies. Bank holding companies are subject to examination, regulation and
periodic reporting under the Bank Holding Company Act, as administered by the
Federal Reserve Board. The Federal Reserve Board has adopted capital adequacy
guidelines for bank holding companies on a consolidated basis substantially
similar to those of the FDIC for Westfield Bank. As of December 31, 2000,
84
Westfield Financial's total capital and Tier 1 capital ratios for Westfield
Financial would, on a pro forma basis, exceed these minimum capital
requirements. See "Regulatory Capital Compliance."
Regulations of the Federal Reserve Board provide that a bank holding
company must serve as a source of strength to any of its subsidiary banks and
must not conduct its activities in an unsafe or unsound manner. Under the prompt
corrective action provisions of the FDIC Improvement Act, a bank holding company
parent of an undercapitalized subsidiary bank would be directed to guarantee,
within limitations, the capital restoration plan that is required of such an
undercapitalized bank. See "- Federal Banking Regulation - Prompt Corrective
Action." If the undercapitalized bank fails to file an acceptable capital
restoration plan or fails to implement an accepted plan, the Federal Reserve
Board may prohibit the bank holding company parent of the undercapitalized bank
from paying any dividend or making any other form of capital distribution
without the prior approval of the Federal Reserve Board.
As bank holding companies, Westfield Mutual Holding Company and
Westfield Financial will be required to obtain the prior approval of the Federal
Reserve Board to acquire all, or substantially all, of the assets of any bank or
bank holding company. Prior Federal Reserve Board approval will be required for
Westfield Mutual Holding Company or Westfield Financial to acquire direct or
indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would, directly
or indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company.
A bank holding company is required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, will be equal to 10% or more of the company's
consolidated net worth. The Federal Reserve Board may disapprove such a purchase
or redemption if it determines that the proposal would constitute an unsafe and
unsound practice, or would violate any law, regulation, Federal Reserve Board
order or directive, or any condition imposed by, or written agreement with, the
Federal Reserve Board. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the Federal Reserve Board, that has received a composite "1" or
"2" rating at its most recent bank holding company inspection by the Federal
Reserve Board, and that is not the subject of any unresolved supervisory issues.
In addition, a bank holding company which does not qualify as a
financial holding company under the Gramm-Leach-Bliley Financial Services
Modernization Act, is generally prohibited from engaging in, or acquiring direct
or indirect control of any company engaged in non-banking activities. One of the
principal exceptions to this prohibition is for activities found by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be permissible. Some of the principal activities that the Federal
Reserve Board has determined by regulation to be so closely related to banking
as to be permissible are:
o making or servicing loans;
o performing certain data processing services;
85
o providing discount brokerage services;
o acting as fiduciary, investment or financial advisor;
o leasing personal or real property;
o making investments in corporations or projects designed
primarily to promote community welfare; and
o acquiring a savings and loan association.
Bank holding companies that do qualify as a financial holding company may engage
in activities that are financial in nature or incident to activities which are
financial in nature. Bank holding companies may qualify to become a financial
holding company if:
o each of its depository institution subsidiaries is "well
capitalized";
o each of its depository institution subsidiaries is "well
managed";
o each of its depository institution subsidiaries has at least a
"satisfactory" Community Reinvestment Act rating at its most
recent examination; and
o the bank holding company has filed a certification with the
Federal Reserve Board that it elects to become a financial
holding company.
Under the Federal Deposit Insurance Act, depository institutions are
liable to the FDIC for losses suffered or anticipated by the FDIC in connection
with the default of a commonly controlled depository institution or any
assistance provided by the FDIC to such an institution in danger of default.
This law would potentially be applicable to Westfield Mutual Holding Company or
Westfield Financial if it ever acquired as a separate subsidiary a depository
institution in addition to Westfield Bank.
Massachusetts Regulation
Under the Massachusetts banking laws, a company owning or controlling
two or more banking institutions, including a savings bank, is regulated as a
bank holding company. The term "company" is defined by the Massachusetts banking
laws similarly to the definition of "company" under the Bank Holding Company
Act. Each Massachusetts bank holding company:
o must obtain the approval of the Massachusetts Board of Bank
Incorporation before engaging in certain transactions, such as
the acquisition of more than 5% of the voting stock of another
banking institution; and
o must register, and file reports, with the Division; and
o is subject to examination by the Division.
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Westfield Mutual Holding Company or Westfield Financial will become a
Massachusetts bank holding company if they acquire a second banking institution
and hold and operate it separately from Westfield Bank.
Acquisition of Westfield Financial
Under federal law, no person may acquire control of Westfield Financial
or Westfield Bank without first obtaining, as summarized below, approval of such
acquisition of control by the Federal Reserve Board.
Federal Restrictions. Under the federal Change in Bank Control Act, any
person (including a company), or group acting in concert, seeking to acquire 10%
or more of the outstanding shares of Westfield Financial's common stock will be
required to submit prior notice to the Federal Reserve Board, unless the Federal
Reserve Board has found that the acquisition of such shares will not result in a
change in control of Westfield Financial. Under the Change in Bank Control Act,
the Federal Reserve Board has 60 days within which to act on such notices,
taking into consideration factors, including the financial and managerial
resources of the acquiror, the convenience and needs of the communities served
by Westfield Financial and Westfield Bank, and the anti-trust effects of the
acquisition. Under the Bank Holding Company Act, any company would be required
to obtain prior approval from the Federal Reserve Board before it may obtain
"control," within the meaning of the Bank Holding Company Act, of Westfield
Financial. The term "control" is defined generally under the Bank Holding
Company Act to mean the ownership or power to vote 25% more of any class of
voting securities of an institution or the ability to control in any manner the
election of a majority of the institution's directors. An existing bank holding
company would require FRB approval prior to acquiring more than 5% of any class
of voting stock of Westfield Financial.
Massachusetts Restrictions. Under the Massachusetts banking laws, the
prior approval of the Division is required before any person may acquire a
Massachusetts bank holding company. For this purpose, the term "person" is
defined broadly to mean a natural person or a corporation, company, partnership,
or other forms of organized entities. The term "acquire" is defined differently
for an existing bank holding company and for other companies or persons. A bank
holding company will be treated as "acquiring" a Massachusetts bank holding
company if the bank holding company acquires more than 5% of any class of the
voting shares of the bank holding company. Any other person will be treated as
"acquiring" a Massachusetts bank holding company if it acquires ownership or
control of more than 25% of any class of the voting shares of the bank holding
company.
Dividend Waivers by Westfield Mutual Holding Company
Certain mutual holding companies have waived the receipt of dividends
declared by its savings institution subsidiary. Any such dividend waiver by
Westfield Mutual Holding Company will be subject to the following restrictions:
Massachusetts Restrictions. Under applicable Massachusetts regulations,
a mutual holding company may not waive any dividends to be paid by any of its
subsidiary institution if any shares of the stock to which the waiver would
apply is held by an insider (any officer,
87
director, or corporator of the mutual holding company or a subsidiary
banking institution) or a stock benefit of the mutual holding company unless
prior written notice of the waiver has been given to the Division and the
Division does not object to the waiver. The Division may not object to a
dividend waiver notice if:
o the waiver would not be detrimental to the safe and sound
operation of the subsidiary banking institution; and
o the board of directors of the mutual holding company expressly
determines, as evidenced by a resolution of the board of
directors, that such waiver is consistent with the directors'
fiduciary duties to the mutual members of the mutual holding
company.
Federal Restrictions. In connection with its approval of the
reorganization, however, it is expected that the Federal Reserve Board will
impose certain conditions on the waiver by Westfield Mutual Holding Company of
dividends paid on the common stock by Westfield Financial. In particular, the
Federal Reserve Board is expected to require that Westfield Mutual Holding
Company obtain the prior approval of the Federal Reserve Board before Westfield
Mutual Holding Company may waive any dividends from Westfield Financial. As of
the date hereof, we are not aware that the Federal Reserve Board has given its
approval to any waiver of dividends by any mutual holding company that has
requested such approval.
We also expect that the terms of the Federal Reserve Board approval of
the reorganization will require that the amount of dividends waived by Westfield
Mutual Holding Company will not be available for payment to its public
stockholders of Westfield Financial (i.e., stockholders other than Westfield
Mutual Holding Company) and that such amount will be excluded from Westfield
Financial's capital for purposes of calculating dividends payable to the public
stockholders. Moreover, Westfield Bank is required to maintain the cumulative
amount of dividends waived by Westfield Mutual Holding Company in a restricted
capital account that would be added to the liquidation account established in
the reorganization. This amount would not be available for distribution to
public stockholders. See "The Reorganization and the Stock Offering - Effects of
the Reorganization - Liquidation Rights." The restricted capital account and
liquidation account amounts would not be reflected in Westfield Bank's financial
statements, but would be considered as a notional or memorandum account of
Westfield Bank. These accounts would be maintained in accordance with the laws,
rules, regulations and policies of the Division of Banks and the plan of
reorganization. The plan of reorganization also provides that if Westfield
Mutual Holding Company converts to stock form in the future, commonly referred
to as a second-step conversion, any waived dividends would reduce the percentage
of the converted company's shares of common stock issued to public stockholders
in connection with any such transaction. For additional information regarding
the possible second-step conversion of Westfield Mutual Holding Company, see
"The Reorganization and the Stock Offering - Possible Conversion of Westfield
Mutual Holding Company to Stock Form."
Westfield Mutual Holding Company does not expect initially to waive
dividends declared by Westfield Financial. If Westfield Mutual Holding Company
decides that it is in its best interest to waive a particular dividend to be
paid by Westfield Financial and the Federal Reserve Board approves such waiver,
then Westfield Financial would pay such dividend only to its public
stockholders. The amount of the dividend waived by Westfield Mutual Holding
Company would
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be treated in the manner described. Westfield Mutual Holding Company's
decision as to whether or not to waive a particular dividend will depend on a
number of factors, including Westfield Mutual Holding Company's capital needs,
the investment alternatives available to Westfield Mutual Holding Company as
compared to those available to Westfield Financial, and the possibility of
regulatory approvals. We cannot guarantee:
o that after the reorganization, Westfield Mutual Holding
Company will waive dividends paid by Westfield Financial;
o that if the application is made to waive a dividend, that the
Federal Reserve Board will approve such dividend waiver
request; or
o what conditions might be imposed by the Federal Reserve Board
on any dividend waiver.
Taxation
Federal
General. The following discussion is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to Westfield Bank, Westfield Mutual Holding Company or Westfield Financial. For
federal income tax purposes, we report income on the basis of a taxable year
ending December 31, using the accrual method of accounting, and we are generally
subject to federal income taxation in the same manner as other corporations.
Following the reorganization, Westfield Bank and Westfield Financial will
constitute an affiliated group of corporations and, therefore, will be eligible
to report their income on a consolidated basis. Because Westfield Mutual Holding
Company will own less than 80% of the common stock of Westfield Financial, it
will not be a member of such affiliated group and will report its income on a
separate return. Westfield Bank and Westfield Mutual Holding Company are not
currently under audit by the IRS.
Distributions. To the extent that we (Westfield Bank) make
"non-dividend distributions" to stockholders, such distributions will be
considered to result in distributions from our unrecaptured tax bad debt reserve
as of December 31, 1987 (our "base year reserve"), to the extent thereof and
then from our supplemental reserve for losses on loans, and an amount based on
the amount distributed will be included in our income. Non-dividend
distributions include distributions in excess of our current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. Dividends paid out of our current or
accumulated earnings and profits will not be included in our income.
The amount of additional income created from a non-dividend
distribution is equal to the lesser of our base year reserve and supplemental
reserve for losses on loans or an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus, in
some situations, approximately one and one-half times the non-dividend
distribution would be includible in gross income for federal income tax
purposes, assuming a 34% federal corporate income tax rate. We do not intend to
pay dividends that would result in the recapture of any portion of our bad debt
reserves.
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Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended (the "Code"), imposes a tax on alternative minimum taxable income at
a rate of 20%. Only 90% of alternative minimum taxable income can be offset by
net operating loss carryovers of which we currently have none. Alternative
minimum taxable income is also adjusted by determining the tax treatment of
certain items in a manner that negates the deferral of income resulting from the
regular tax treatment of those items. We have not been subject to a tax on
alternative minimum taxable income during the past five years.
Elimination of Dividends; Dividends Received Deduction. Westfield
Financial may exclude from its income 100% of dividends received from Westfield
Bank as a member of the same affiliated group of corporations. Because following
the reorganization, Westfield Mutual Holding Company will not be a member of
such affiliated group, it will not qualify for such 100% dividends exclusion,
but will be entitled to deduct 80% of the dividends it receives from Westfield
Financial so long as it owns more than 20% of the common stock.
State
Westfield Bank files Massachusetts Financial Institution excise tax
returns. Generally, the income of financial institutions in Massachusetts, which
is calculated based on federal taxable income, subject to certain adjustments,
is subject to Massachusetts tax. Westfield Bank is not currently under audit
with respect to its Massachusetts income tax returns and its state tax returns
have not been audited for the past five years.
Westfield Financial will be required to file a Massachusetts income tax
return and will generally be subject to a state income tax rate that is the same
tax rate as the tax rate for financial institutions in Massachusetts. However,
Westfield Securities Corp., a Massachusetts securities corporation and a
wholly-owned subsidiary of Westfield Bank,Financial, will be taxed at a rate that is
currently lower than income tax rates for savings institutions in Massachusetts.
Management
Shared Management Structure
Westfield Financial's directors and executive officers will be the same
as Westfield Bank's. Although it has no current plans to do so, Westfield Bank
may choose to appoint additional directors in the future. We expect that
Westfield Financial and Westfield Bank will continue to have common executive
officers until there is a business reason to establish separate management
structures.
To date, Westfield Bank has compensated its directors and executive
officers for their services to the bank. Westfield Financial has not paid any
additional compensation to these people for their additional services to the
holding company. We expect to continue this practice in the case of executive
officers after the reorganization until we have a business reason to establish
separate compensation programs. Until then, we expect Westfield Financial to
reimburse Westfield Bank for a part of the compensation paid to each executive
officer that is proportionate to the amount of time which he or she devotes to
performing services for Westfield Financial.
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Corporators
Corporators are individuals that constitute a governing body for
Massachusetts-chartered mutual savings banks and mutual holding companies. Under
Massachusetts law, such mutual institutions must have at least 25 corporators
who are residents of the communities in which the savings banks or mutual
holding companies conducts their businesses. Corporators serve for a term of ten
years and have such powers as are expressly reserved to them under Massachusetts
law to act on such matters that are properly brought before them by trustees.
The duties of corporators typically include the annual election of trustees and
the approval of significant events involving the governance and corporate
structure of the mutual institution's charter and bylaws and the institution's
reorganization or reorganization from mutual to stock form. Under Massachusetts
law, the corporators of Westfield Mutual Holding Company will continue to serve
as corporators after the completion of the reorganization and stock offering. As
of June 30, 2001, Westfield Mutual Holding Company had 79 corporators.
Directors
Composition of our Board. Upon completion of the reorganization and
stock offering, Westfield Financial will have 12 directors, each of whom will
belong to one of three classes with staggered three-year terms of office.
Classes One, Two and Three will have directors whose terms expire in 2002, 2003
and 2004, respectively. At each of the annual shareholder meetings of Westfield
Financial, the shareholders will elect directors to fill the seats of the
directors whose terms are expiring in that year and any vacant seats. Directors
of Westfield Bank will be elected by Westfield Financial as its sole
stockholder.
Who Our Directors Are. The following table states our directors' names,
their ages as of their birthdays in 2001, the years when they began serving as
directors and the years when their current terms of office as directors will
expire.
Bank Company
Director Director Term
Name Age Since Since Expires
- ----------------------------- ----------- -------------- ---------------- ------------------
Victor J. Carra 61 1995 2001 2003
David C. Colton, Jr. 58 1980 2001 2002
Robert T. Crowley, Jr. 53 1999 2001 2004
Thomas J. Howard 69 1979 2001 2003
Harry C. Lane 63 1978 2001 2004
William H. McClure 66 1996 2001 2004
Mary C. O'Neil 66 1994 2001 2002
Richard C. Placek 62 1979 2001 2003
Paul R. Pohl 60 1999 2001 2004
Charles E. Sullivan 58 1992 2001 2003
Thomas C. Sullivan 68 1989 2001 2003
Donald A. Williams 57 1983 2001 2002
-
---------------------------------------------------------------------------------------------
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Our Directors' Backgrounds. The business experience for the past five
years of each of our directors is as follows:
Victor J. Carra has served as the Executive Vice President of Westfield
Bank since 1998. Since 1975, Mr. Carra has served in various capacities during
his employment with Westfield Bank.
David C. Colton, Jr. is the owner and operator of The Colton Agency,
Inc., an insurance agency located in Westfield, Massachusetts. Mr. Colton has
served in these capacities since 1966.
Robert T. Crowley, Jr. is a Certified Public Accountant and a partner
in the accounting firm of Downey, Sweeney, Fitzgerald & Co., P.C. Mr. Crowley
has been a partner with this firm since 1980 and a Certified Public Accountant
since 1979.
Thomas J. Howard retired from Westfield Bank in 1994 after having
served as an Assistant Treasurer, Treasurer, Vice President and Executive Vice
President during his employment with Westfield Bank since 1964. Since his
retirement in 1994, Mr. Howard has served as a corporator and trustee of
Westfield Mutual Holding Company and a director of Westfield Bank.
Harry C. Lane is the President of John S. Lane & Son, Inc., a quarry
and asphalt company located in Westfield, Massachusetts. Mr. Lane has served in
this capacity since 1986.
William H. McClure is the President of the McClure Insurance Agency,
Inc., a position he has held since 1993.
Mary C. O'Neil is the Director of Development and Marketing at Noble
Health Systems, located in Westfield, Massachusetts. Ms. O'Neil has held this
position since 1993. Prior to that, she served as President of T.L. O'Neil
Insurance Agency, Inc.
Richard C. Placek is the President of Commercial Distributing Company,
located in Westfield Massachusetts. Mr. Placek has held this position since
1985. Prior to that, he served as General Manager.
Paul R. Pohl has served as the President and Owner of Chemi-Graphic,
Inc., a machinery labeling company located in East Longmeadow, Massachusetts.
Mr. Pohl has served in this capacity since 1964.
Charles E. Sullivan is the President of Charles E. Sullivan C.P.A.,
Inc., a public accounting firm located in West Springfield, Massachusetts. Mr.
Sullivan has served in this capacity since 1979.
Thomas C. Sullivan is retired and was formerly the President and Chief
Operating Officer of Sullivan Paper Co., Inc., located in West Springfield,
Massachusetts. He retired from this position in 1998. Mr. Sullivan presently
serves as a director of Sullivan Paper Co., Inc., a position he has held since
1959. He also serves as President and Director of Patriot Realty, located in
Appleton, Wisconsin and is the Vice President and Director of George Sullivan
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Realty, a realty company located in West Springfield, Massachusetts. Mr.
Sullivan has served in these capacities since 1994 and 1970, respectively.
Donald A. Williams has served as President of Westfield Bank since 1983
and Chief Executive Officer of Westfield Bank since 1987.
Meetings of the Board of Directors and Its Committees
Our Boards of Directors meet on a monthly basis and may hold additional
special meetings. During 2000, the Board of Directors of Westfield Bank held 12
regular meetings and two special meetings. The Board of Directors of Westfield
Financial did not meet in 2001.
The Boards of Directors of Westfield Bank and Westfield Financial
maintain Executive, Audit, and Nominating Committees. Each of these committees
is composed of the same members for both Westfield Bank and Westfield Financial.
The Executive Committee consists of Messrs. Colton, Lane, C. Sullivan
and Williams, and Ms. O'Neill. The Executive Committees meet as needed with the
full power of the Board of Directors. The Executive Committee of Westfield Bank
met 48 times during 2000.
The Audit Committees consist of Messrs. Crowley, McClure and Placek.
These Committees review the annual audit prepared by the independent
accountants, recommend the appointment of accountants and review the work of the
internal auditors. The Audit Committee of Westfield Bank met four times during
2000.
The Nominating Committees consist of the members of the Executive
Committee. These Committees nominate individuals for election to the Board of
Directors. The Nominating Committee of Westfield Bank met once during 2000.
Director Compensation
Meeting Fees. Westfield Bank's practice has been to pay a fee of $700
to each of its non-employee directors for attendance at each board meeting.
In addition, each member of the Executive Committee received $1,733 per
month for attendance at meetings, while each member of the Audit Committee
received $400 for each meeting the member attended. Westfield Bank paid fees
totaling $122,000 to its non-employee directors for the year ended December 31,
2000.
Stock Benefit Plans. We anticipate that the directors will be eligible
to participate in the stock option and management recognition plans expected to
be implemented following the completion of the reorganization and stock
offering.
Directors' Deferred Compensation Plan. Westfield Bank has established
the Westfield Bank Directors' Deferred Compensation Plan for the benefit of
non-employee directors. Under the Deferred Compensation Plan, each non-employee
director may make an annual election to defer receipt of all or a portion of his
or her director fees received from Westfield Financial,
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Westfield Bank and Westfield Mutual Holding Company. The deferred
amounts are allocated to a deferral account and credited with interest at an
annual rate equal to the rate on the highest yielding certificate of deposit
issued by Westfield Bank during the year or according to the investment return
of other assets as may be selected by the Compensation Committee of Westfield
Bank. The Deferred Compensation Plan is an unfunded, non-qualified plan that
provides for distribution of the amounts deferred to participants or their
designated beneficiaries upon the occurrence of certain events such as death,
retirement, disability or a change in control of Westfield Financial or
Westfield Bank (as those terms are defined in the Deferred Compensation Plan).
EXECUTIVE OFFICERS
Executive Officers Who are Not Directors
Michael J. Janosco, Jr., age 54, has served as the Chief Financial
Officer and Treasurer of Westfield Bank since 1999. Mr. Janosco was previously a
partner at KPMG Peat Marwick until his retirement in 1994. From 1994 to 1997, he
served as the Chief Financial Officer and Treasurer of Primary Bank, located in
Peterborough, New Hampshire.
James C. Hagan, age 40, has served as Vice President and Commercial
Loan Department Manager of Westfield Bank since 1998. From 1994 through 1998,
Mr. Hagan was a Commercial Loan Officer at Westfield Bank.
Rebecca S. Kozaczka, age 51, has served as Vice President and
Residential Loan Officer at Westfield Bank since 1989.
Deborah J. McCarthy, age 42, has served as Vice President and
Operations Department Manager since 2000. She has worked for Westfield Bank in
numerous capacities since 1979.
Executive Officer Compensation
Summary Compensation Table. The following table provides information
about the compensation paid for 2000 to Westfield Bank's Chief Executive Officer
and to the other most highly compensated executive officers whose annual salary
and bonus for 2000 was at least $100,000.
Annual Compensation
----------------------------------------
Other Annual
Name and Compensation All Other
Principal Position Year Salary ($) Bonus ($) ($)(a) Compensation(b)
- ---------------------------------------------- --------- ------------- ------------ ----------- -------------------
Donald A. Williams, President and Chief 2000 267,616 40,234 - $ 104,135
Executive Officer
Michael J. Janosco, Jr., Chief Financial 2000 139,000 20,850 - 4,344
Officer and Treasurer
Victor J. Carra, Executive Vice President 2000 128,741 19,584 - 38,659
-
-----------------------
(a) Westfield Bank provides its executive officers with non-cash benefits and
perquisites, such as the use of employer-owned or leased automobiles.
Management of the Bank believes that the aggregate value of these benefits
for 2000 did not, in the
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case of any executive officer, exceed $50,000 or 10% of the aggregate
salary and annual bonus reported for him in the Summary Compensation Table.
(b) Includes the following components: (1) employer matching contributions to
the Westfield Bank 401(k) Plan: Mr. Donald A. Williams, $5,100; Mr. Michael
J. Janosco, Jr., $3,210; and Mr. Victor J. Carra, $3,873; (2) the dollar
value of premium payments for life insurance coverage provided by Westfield
Bank: Mr. Donald A. Williams, $2,058; Mr. Michael J. Janosco, Jr., $1,134;
and Mr. Victor J. Carra, $1,420; and (3) amounts accrued under deferred
compensation agreements: Mr. Donald A. Williams, $96,977 and Mr. Victor J.
Carra, $33,366.
Employment Agreements
Westfield Financial and Westfield Bank have jointly entered into
employment agreements with Mr. Donald A. Williams to secure his services as
President and Chief Executive Officer, Mr. Victor J. Carra to secure his
services as Executive Vice President, and Mr. Michael J. Janosco, Jr., to secure
his services as Chief Financial Officer. For purposes of Westfield Financial's
obligations, the employment agreements have rolling three-year terms beginning
on the effective date of the reorganization, which by decision of the executive
or joint decision of Westfield Financial and Westfield Bank may be converted to
a fixed three-year term. For purposes of Westfield Bank's obligations the
employment agreements have fixed terms of three years beginning on the effective
date of the reorganization, and may be renewed annually after a review of the
executive's performance. These agreements provide for minimum annual salaries of
$290,498, $142,116 and $152,100, respectively, discretionary cash bonuses, and
participation on generally applicable terms and conditions in other compensation
and fringe benefit plans. They also guarantee customary corporate
indemnification and errors and omissions insurance coverage throughout the
employment term and for six years after termination.
Westfield Financial and Westfield Bank may terminate each executive's
employment, and each executive may resign, at any time with or without cause.
However, in the event of termination during the term without cause, they will
owe the executive severance benefits generally equal to the value of the cash
compensation and fringe benefits that the executive would have received if he
had continued working for an additional three years. The same severance benefits
would be payable if the executive resigns during the term following: a loss of
title, office or membership on the board of directors; material reduction in
duties, functions or responsibilities; involuntary relocation of the executive's
principal place of employment to a location over 25 miles in distance from
Westfield Bank's principal office in Westfield, Massachusetts and over 25 miles
from the executive's principal residence; or other material breach of contract
by Westfield Financial or Westfield Bank which is not cured within 30 days. For
60 days after a change in control, each executive may resign for any reason and
collect severance benefits as if he or she had been discharged without cause.
The employment agreements also provide uninsured death and disability benefits.
If Westfield Financial or Westfield Bank experiences a change in
ownership, a change in effective ownership or control or a change in the
ownership of a substantial portion of their assets as contemplated by section
280G of the Internal Revenue Code, a portion of any severance payments under the
employment agreements might constitute an "excess parachute payment" under
current federal tax laws. Federal tax laws impose a 20% excise tax, payable by
the executive, on excess parachute payments. Under the employment agreements,
Westfield Bank and Westfield Financial would reimburse the executive for the
amount of this excise tax and would make an additional gross-up payment so that,
after payment of the excise tax and all
95
income and excise taxes imposed on the reimbursement and gross-up payments,
the executive will retain approximately the same net-after tax amounts
under the employment agreement that he or she would have retained if there were
no 20% excise tax. The effect of this provision is that Westfield Bank and
Westfield Financial, rather than the executive, bears the financial cost of the
excise tax. Neither Westfield Financial nor Westfield Bank could claim a federal
income tax deduction for an excess parachute payment, excise tax reimbursement
payment or gross-up payment.
Change of Control Agreements
Westfield Bank and Westfield Financial will jointly enter into one-year
change of control agreements with three Vice Presidents,vice presidents, James C. Hagan, Rebecca
S. Kozaczka and Deborah J. McCarthy. The term of these agreements is perpetual
until Westfield Bank gives notice of non-extension, at which time the term is
fixed for one year.
Generally, Westfield Bank may terminate the employment of any officer
covered by these agreements, with or without cause, at any time prior to a
change of control without obligation for severance benefits. However, if
Westfield Bank or Westfield Financial signs a merger or other business
combination agreement, or if a third party makes a tender offer or initiates a
proxy contest, it could not terminate an officer's employment without cause
without liability for severance benefits. The severance benefits would generally
be equal to the value of the cash compensation and fringe benefits that the
officer would have received if he or she had continued working for an additional
one year. Westfield Bank would pay the same severance benefits if the officer
resigns after a change of control following a loss of title, office or
membership on the Board of Directors, material reduction in duties, functions or
responsibilities, involuntary relocation of his or her principal place of
employment to a location over 25 miles from Westfield Bank's principal office on
the day before the change of control and over 25 miles from the officer's
principal residence or other material breach of contract which is not cured
within 30 days. These agreements also provide uninsured death and disability
benefits.
If Westfield Bank or Westfield Financial experiences a change in
ownership, a change in effective ownership or control or a change in the
ownership of a substantial portion of their assets as contemplated by section
280G of the Internal Revenue Code, a portion of any severance payments under the
change of control agreements might constitute an "excess parachute payment"
under current federal tax laws. Any excess parachute payment would be subject to
a federal excise tax payable by the officer and would be non-deductible by
Westfield Bank and Westfield Financial for federal income tax purposes. The
change of control agreements do not provide a tax indemnity.
Benefit Plans
Pension Plan. Westfield Bank maintains a pension plan for its eligible
employees. Generally, employees of Westfield Bank begin participation in the
pension plan once they reach age 21 and complete 1,000 hours of service in a
consecutive 12-month period. Participants in the pension plan become vested in
their accrued benefit under the pension plan upon the earlier of the: (1)
attainment of their "normal retirement age" (as described in the pension plan)
while
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employed at Westfield Bank; (2) completion of five vesting years of service
with Westfield Bank; or (3) death or disability of the participant. Participants
are generally credited with a vesting year of service for each year in
which they complete at least 1,000 hours of service. A participant's normal
benefit under the pension plan equals the sum of (1) 1.25% of the participant's
average compensation (generally defined as the average taxable compensation for
the three consecutive limitation years that produce the highest average) by the
number of years of service the participant has under the plan up to 25 years of
service, plus (2) 0.6% of the excess of the participant's average compensation
over the participant's covered compensation (the social security taxable wage
base for the 35 years ending in the year the participant becomes eligible for
non-reduced social security benefits) for each year of service under the plan up
to 25 years of service. Participants may retire at or after age 65 and receive
their full benefit under the plan. Participants may also retire early at age 62
or at age 55 with ten years of service or at age 50 with 15 years of service
under the plan and receive a reduced retirement benefit. Pension benefits are
payable in equal monthly installments for life, or for married persons, as a
joint survivor annuity over the lives of the participant and spouse.
Participants may also elect a lump sum payment with the consent of their spouse.
If a participant dies while employed by Westfield Bank, a death benefit will be
payable to either his or her spouse or estate, or named beneficiary, equal to
the entire amount of the participant's accrued benefit in the plan. The
following table indicates the annual employer-provided retirement benefits that
would be payable under the pension plan upon retirement at age 65 to a
participant electing to receive his pension benefit in the standard form of
benefit, assuming various specified levels of plan compensation and various
specified years of credited service. Under the Internal Revenue Code, maximum
annual benefits under the pension plan are limited to $140,000 per year and
annual compensation for benefit calculation purposes is limited to $170,000 per
year for the 2001 calendar year.
Years of Service
---------------------------------------------------------------------------------------
Average Annual
Compensation 10 15 20 25 30
- -------------------------- ---------------- ---------------- ----------------- ---------------- ------------------
$ 100,000 $ 16,394 $ 24,591 $ 32,788 $ 40,985 $ 40,985
125,000 21,019 31,529 42,038 52,548 52,548
150,000 25,644 38,466 51,288 64,110 64,110
170,000 29,344 44,016 58,688 73,360 73,360
200,000 29,344 44,016 58,688 73,360 73,360
300,000 29,344 44,016 58,688 73,360 73,360
400,000 29,344 44,016 58,688 73,360 73,360
The benefits listed on the table above for the pension plan are not
subject to a reduction for Social Security benefits or any other offset amount.
As of October 31, 2000, Messrs. Williams, Janosco and Carra had 28, 2, and 25
years of service, respectively, for purposes of the pension plan.
401(k) Plan. Westfield Bank has adopted the SBERA 401(k) Plan, a
tax-qualified defined contribution plan, for substantially all employees of
Westfield Bank who have attained age 21 and completed at least three months of
service. Eligible employees may contribute from 1% to 15% of annual compensation
to the plan on a pre-tax basis each year, subject to limitations of the Internal
Revenue Code (for 2001 the limit is $10,500). Westfield Bank makes a matching
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contribution to the plan equal to 50% of the first six percent of annual
compensation contributed to the plan on a pre-tax basis by a participant after
such participant has completed one year of service.
This plan has an individual account for each participant's
contributions and allows each participant to direct the investment of his or her
account. One permitted investment is Westfield Financial common stock. The plan
itself is not an eligible account holder in this initial stock offering.
However, participants who are eligible account holders and supplemental eligible
account holders may use their subscription rights to purchase stock for their
plan accounts. This plan will purchase common stock for other participants in
the initial stock offering, to the extent that shares are available. After the
stock offering, the plan will purchase common stock in open market transactions.
Participants will direct the voting of shares purchased for their plan accounts.
Employee Stock Ownership Plan (ESOP). This plan is a tax-qualified plan
that covers substantially all employees who have at least one yearcompleted 1,000 hours of
service in a 12 month period and have attained age 21 and21. The ESOP will take effect at
the completion of the reorganization.
Westfield Financial intends to lend this plan enough money to purchase
8% of the shares issued to investors. The plan may purchase all or part of these
shares from Westfield Financial to the extent that shares are available after
filling the subscriptions of eligible account holders. Alternatively, the plan
may purchase all or part of these shares in private transactions or on the open
market after completion of the reorganization to the extent that shares are
available for purchase on reasonable terms. We have not determined whether such
funds would be available to the plan or that such purchase would be made
directly from Westfield Financial in the stock offering, or after completion of
the reorganization. We expect to make such determination immediately prior to
the expiration date for submitting orders in the stock offering. This
determination would be made based on prevailing market conditions. For this
reason, we cannot assure you that the ESOP will purchase shares in the stock
offering after the reorganization, or that such purchases will occur during any
particular time period or at any particular price.
Although contributions to this plan will be discretionary, Westfield
Bank intends to contribute enough money each year to make the required principal
and interest payments on the loan from Westfield Financial. It is expected that
this loan will be for a term of 30 years and will call for level annual payments
of principal and interest. The plan will initially pledge the shares it
purchases as collateral for the loan and hold them in a suspense account.
The plan will not distribute the pledged shares right away. Instead, it
will release a portion of the pledged shares annually. Assuming the plan repays
its loan as scheduled over a 30-year term, we expect that 1/30th of the shares
will be released annually in years 2001 through 2030. The plan will allocate the
shares released each year among the accounts of participants in proportion to
their compensation for the year. For example, if a participant's compensation
for a year represents 1% of the total compensation of all participants for the
year, the plan would allocate to that participant 1% of the shares released for
the year.year, subject to certain legal limitations imposed on tax qualified plans.
Participants direct the voting of shares allocated to their accounts. Shares in
the suspense account will usually be voted by the plan trustee in a way that
mirrors the votes which participants cast for shares in their individual
accounts.
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This plan may purchase additional shares in the future, and may do so
using borrowed funds, cash dividends, periodic employer contributions or other
cash flow.
Benefit Restoration Plan. Westfield Financial has also established the
Benefit Restoration Plan of Westfield Financial in order to provide restorative
payments to executives who are prevented from receiving the full benefits
contemplated by the ESOP's benefit formula as well as the 401(k) Plan's benefit
formula. The restorative payments consist of payments in lieu of shares that
cannot be allocated to participants under the ESOP due to the legal limitations
imposed on tax-qualified plans and, in the case of participants who retire
before the repayment in full of the ESOP's loan, payments in lieu of the shares
that would have been allocated if employment had continued through the full term
of the loan. The restorative payments also consist of amounts unable to be
provided under the 401(k) Plan due to certain legal limitations imposed on
tax-qualified plans.
Deferred Compensation Agreements. Westfield Bank has also entered into
deferred compensation agreements with each of Donald A. Williams and Victor J.
Carra. Under these agreements, each executive is guaranteed monthly payments
equal to 70% of his monthly salary after retirement for the remainder of the
executive's life or 240 months, whichever is greater. The amounts of these
payments is reduced by any payments received from the Pension Plan and are also
reduced by Social Security payments attributable to contributions made by
Westfield Bank. These agreements also provide for payments upon the death or
disability of the executive that are equal in amount to the payments that would
have been payable to the executive upon retirement with such payments being made
for a period of 120 months.
Future Stock Benefit Plans
Stock Option Plan. We intend to implement a stock option plan for our
directors and officers after the reorganization. Applicable regulations prohibit
us from implementing this plan until 6 months after the reorganization. If we
implement this plan within one year after the reorganization, applicable
regulations require that we first obtain the approval of the holders of a
majority of the outstanding shares of Westfield Financial. We have not decided
whether we will implement this plan before or after the one-year anniversary of
the reorganization.
We expect to adopt a stock option plan that will authorize the
Compensation Committee to grant options to purchase up to 10% of the shares sold
in the stock offering over a period of 10 years. The Compensation Committee will
decide which directors and officers will receive options and what the terms of
those options will be. However, no stock option will permit its recipient to
purchase shares at a price that is less than the fair market value of a share on
the date the option is granted, and no option will have a term that is longer
than 10 years. If we implement a stock option plan before the first anniversary
of the reorganization, applicable regulations will require that we observe the
following restrictions:
o We must limit the total number of shares that are optioned to
outside directors to 30% of the shares authorized for the
plan.
o We must also limit the number of shares that are optioned to
any one outside director to 5% of the shares authorized for
the plan and the number of shares that
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are optioned to any executive officer to 25% of the shares
that are authorized for the plan.
o We must not permit the options to become vested at a more
rapid rate than 20% per year beginning on the first
anniversary of stockholder approval of the plan.
o We must not permit accelerated vesting for any reason other
than death or disability.
After the first anniversary of the reorganization, we may amend the plan to
change or remove these restrictions. If we adopt a stock option plan within one
year after the reorganization, we expect to amend the plan later to remove these
restrictions and to provide for accelerated vesting in cases of retirement and
change of control.
We may obtain the shares needed for this plan by issuing additional
shares or through stock repurchases.
We expect the stock option plan will permit the Compensation Committee
to grant either incentive stock options that qualify for special federal income
tax treatment or non-qualified stock options that do not qualify for special
treatment. Incentive stock options may be granted only to employees and will not
create federal income tax consequences when they are granted. If they are
exercised during employment or within three months after termination of
employment, the exercise will not create federal income tax consequences. When
the shares acquired on exercise of an incentive stock option are resold, the
seller must pay federal income taxes on the amount by which the sales price
exceeds the purchase price. This amount will be taxed at capital gains rates if
the sale occurs at least two years after the option was granted and at least one
year after the option was exercised. Otherwise, it is taxed as ordinary income.
Non-qualified stock options may be granted to either employees or
non-employees such as directors, consultants and other service providers.
Incentive stock options that are exercised more than three months after
termination of employment are treated as non-qualified stock options.
Non-qualified stock options will not create federal income tax consequences when
they are granted. When they are exercised, federal income taxes must be paid by
the individual on the amount by which the fair market value of the shares
acquired by exercising the option exceeds the exercise price. When the shares
acquired on exercise of a non-qualified stock option are resold, the seller must
pay federal income taxes on the amount by which the sales price exceeds the
purchase price plus the amount included in ordinary income when the option was
exercised. This amount may be taxed at capital gains rates provided the
individual holds the stock for a minimum of one year, which will vary depending
upon the time that has elapsed since the exercise of the option.
When a non-qualified stock option is exercised, Westfield Financial and
Westfield Bank may be allowed a federal income tax deduction for the same amount
that the option holder includes in his or her ordinary income. When an incentive
stock option is exercised, there is no tax deduction unless the shares acquired
are resold sooner than two years after the option was granted or one year after
the option was exercised.
100
Management Recognition Plan. We intend to implement a management
recognition plan for our directors and officers after the reorganization.
Applicable regulations prohibit us from implementing this plan until 6 months
after the reorganization. If we implement this plan within one year after the
reorganization, the regulations require that we first obtain the approval of the
holders of a majority of the outstanding shares of Westfield Financial. We have
not decided whether we will implement this plan before or after the one-year
anniversary of the reorganization.
We expect to adopt a management recognition plan that will authorize
the Compensation Committee to make restricted stock awards of up to 4% of the
shares issued to investors. The Compensation Committee will decide which
directors and officers will receive restricted stock and what the terms of those
awards will be. If we implement a management recognition plan before the first
anniversary of the reorganization, applicable regulations will require that we
observe the following restrictions:
o We must limit the total number of shares that are awarded to
outside directors to 30% of the shares authorized for the
plan.
o We must also limit the number of shares that are awarded to
any one outside director to 5% of the shares authorized for
the plan and the number of shares that are awarded to any
executive officer to 25% of the shares that are authorized for
the plan.
o We must not permit the awards to become vested at a more rapid
rate than 20% per year beginning on the first anniversary of
stockholder approval of the plan.
o We must not permit accelerated vesting for any reason other
than death or disability.
After the first anniversary of the reorganization, we may amend the
plan to change or remove these restrictions. If we adopt a management
recognition plan within one year after the reorganization, we expect to amend
the plan later to remove these restrictions and to provide for accelerated
vesting in cases of retirement and change of control. We expect that any other
amendment to this plan (whether adopted before or after the first anniversary of
the plan's initial effective date) will be subject to stockholder approval if it
would change the class of people eligible to receive benefits, change the price
they must pay for stock which they acquire under the plan, or increase the
number of shares available under the plan or increase the maximum amount of
stock that may be acquired by any one person under the plan.
We may obtain the shares needed for this plan by issuing additional
shares or through stock repurchases.
Restricted stock awards under this plan may feature employment
restrictions that require continued employment for a period of time for the
award to be vested. They may feature restrictions that require the achievement
of specified corporate or individual performance goals for the award to be
vested. Or, they may feature a combination of employment and performance
restrictions. Awards are not vested unless the specified employment restrictions
and performance goals are met. However, pending vesting, the award recipient may
have voting and dividend
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rights. When an award becomes vested, the recipient must include the current
fair market value of the vested shares in his income for federal income
tax purposes. Westfield Financial and Westfield Bank may be allowed a federal
income tax deduction in the same amount. Depending on the nature of the
restrictions attached to the restricted stock award, Westfield Financial and
Westfield Bank may have to recognize a compensation expense for accounting
purposes ratably over the vesting period or in a single charge when the
performance conditions are satisfied.
Limitations on Federal Tax Deductions for Executive Officer Compensation
As a private entity, Westfield Bank has been subject to federal tax
rules which permit it to claim a federal income tax deduction for a reasonable
allowance for salaries or other compensation for personal services actually
rendered. Following the reorganization, federal tax laws may limit this
deduction to $1 million each tax year for each executive officer named in the
summary compensation table in Westfield Financial's proxy statement for that
year. This limit will not apply to non-taxable compensation under various
broad-based retirement and fringe benefit plans, to compensation that is paid in
"qualified performance-based compensation" under applicable law or to
compensation that is paid in satisfaction of commitments that arose before the
reorganization. Westfield Financial and Westfield Bank expect that the
Compensation Committee will take this deduction limitation into account with
other relevant factors in establishing the compensation levels of their
executive officers and in setting the terms of compensation programs. Currently,
none of our executive officers receive annual compensation expected to exceed
this limit. However, there is no assurance that all compensation paid to our
executive officers will be deductible for federal income tax purposes. To the
extent that compensation paid to any executive officer is not deductible, the
net after-tax cost of providing the compensation will be higher and the net
after-tax earnings of Westfield Financial and Westfield Bank will be reduced.
Transactions with Directors/Trustees and Executive Officers
We make loans to our trustees/directors, officers and employees. These
loans bear interest at the same rate as loans offered to non-trustees/directors,
officers and employees and have the same underwriting terms that apply to
non-trustees/directors, officers and employees. The aggregate amount outstanding
for all such loans was $4.8$4.7 million, $3.8$3.6 million and $3.8$3.6 million at June 30,
2001, December 31, 2000 and 1999, respectively.
Proposed Purchases of Common Stock by Management
The following table presents, for each of our directors and executive
officers, the amount of stock they wish to purchase in the stock offering. We
have assumed that a sufficient number of shares will be available to satisfy
their subscriptions. The amounts include shares that may be purchased through
individual retirement accounts and by associates of the directors and executive
officers. Collectively our directors and executive officers expect to purchase a
total of 173,500 shares, or approximately 4.0% of shares we sell in the stock
offering (assuming the sale of 4,324,000 shares of common stock). These shares
do not include shares expected to be issued under any stock benefit plans of
Westfield Financial If all shares issuable under such stock
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benefit plans were issued to directors and executive officers of Westfield
Financial, directors and executive officers of Westfield Financial
would own 1,124,780 shares, or 26.0% of the shares sold in the stock offering
(assuming the sale of 4,324,000 shares of the common stock).
Number
Name Amount of shares
---------------------- --------------------
Directors and Executive Officers:
Victor J. Carra ...................... $ 300,000 30,000
David D. Colton, Jr. ................. $ 20,000 2,000
Robert T. Crowley, Jr. ............... $ 25,000 2,500
Thomas J. Howard ..................... $ 10,000 1,000
Michael J. Janosco, Jr. .............. $ 300,000 30,000
Harry C. Lane ........................ $ 10,000 1,000
William H. McClure ................... $ 50,000 5,000
Mary C. O'Neil ....................... $ 5,000 500
Richard C. Placek .................... $ 50,000 5,000
Paul R. Pohl ......................... $ 300,000 30,000
Charles E. Sullivan .................. $ 15,000 1,500
Thomas C. Sullivan ................... $ 300,000 30,000
Donald A. Williams ................... $ 300,000 30,000
Other executive officers as a group .. $ 50,000 5,000
---------- -------
Total to be purchased by directors and
executive officers ................... $1,735,000 173,500
========== =======
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The Reorganization and the Stock Offering
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The Board of Directors of Westfield Bank, the Board of Trustees of Westfield
Mutual Holding Company, and the Board of Corporators of Westfield Mutual Holding
Company have adopted the plan of reorganization and minority stock issuance. The
Commissioner of the Division of Banks of the Commonwealth of Massachusetts has
also approved of the plan of reorganization and minority stock issuance.
Approval by the Commissioner does not constitute an endorsement of the
reorganization by the Commissioner.
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General
On June 19, 2001, Westfield Mutual Holding Company's Board of Trustees
unanimously adopted the plan of reorganization and minority stock issuance
pursuant to which Westfield Mutual Holding Company will establish Westfield
Financial, a Massachusetts chartered stock holding company. This reorganization
includes the offering by Westfield Financial of up to 49% of its shares to
qualifying depositors of Westfield Bank and tax qualified employee plans of
Westfield Bank in a subscription offering and to certain other persons in a
direct community offering and/or syndicated community offering. Westfield Mutual
Holding Company will own at least 51% of the outstanding common stock of
Westfield Financial. Under the terms of the plan of reorganization, Westfield
Financial will own all of the stock of Westfield Bank. The reorganization will
be effected as described under "-Effects of the Reorganization -Tax Aspects" or
in any other manner that is permitted by the Division and the Federal Reserve
Board and is consistent with the intent of the plan of reorganization and
minority stock issuance. See "Our Reorganization and Stock Offering" in the
Summary section of this prospectus for a chart which reflects our structure
after the reorganization.
Westfield Financial has received approval from the Federal Reserve Bank
of Boston to become a bank holding company and to acquire Westfield Bank. The
plan of reorganization and minority stock issuance was approved by the Division,
subject to, among other things, approval of the plan of reorganization and
minority stock issuance by the corporators of Westfield Mutual Holding Company.
Corporators are individuals that constitute a governing body for
Massachusetts-chartered mutual savings banks and mutual holding companies. Under
Massachusetts law, each mutual savings bank must have at least 25 corporators
who generally are residents of the communities in which the savings bank
conducts its business. Corporators serve for a term of ten years and, by law,
are required to approve certain transactions of the mutual holding company,
including any proposed reorganization. Depositors do not have voting rights with
respect to Massachusetts-chartered savings banks.
Westfield Mutual Holding Company held a special meeting of corporators
for this purpose on October __, 2001. At such meeting, the plan of
reorganization and minority stock issuance was approved by an affirmative vote
of a majority of Westfield Mutual Holding Company's corporators and a majority
of Westfield Mutual Holding Company's independent corporators. An independent
corporator is a person who is not an employee, officer, trustee or significant
borrower of Westfield Mutual Holding Company or Westfield Bank.
The aggregate price of the shares of common stock to be issued in the
stock offering will be within the offering range, subject to a 15% increase. The
offering range has been established
104
by the Board of Trustees to be between $31,960,000 and $43,240,000 and is
based upon an independent appraisal of the estimated pro forma market value
of the common stock of Westfield Financial. The appraisal was prepared by RP
Financial, a consulting firm experienced in the valuation and appraisal of banks
and other financial institutions. All shares of common stock to be issued and
sold pursuant to the minority stock issuance will be sold at the same price
($10.00) per share. The independent appraisal will be affirmed or, if necessary,
updated at the termination of the stock offering. See "-How We Determined the
Offering Range and the $10.00 Price Per Share" for additional information as to
the determination of the estimated pro forma market value of the common stock.
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The following is a brief summary of pertinent aspects of the reorganization. A
copy of the plan is available from Westfield Bank upon request and is available
for inspection at the offices of Westfield Bank and at the Division of Banks.
The plan is also filed as an exhibit to the Registration Statement of which this
prospectus is a part, copies of which may be obtained from the SEC. See "Where
You Can Find Additional Information."
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Reasons for the Reorganization
Formation of Westfield Financial as a stock subsidiary of Westfield
Mutual Holding Company will permit us to issue common stock, which is a source
of capital not currently available to us.
Funds raised in the stock offering will allow Westfield Bank to better
serve the needs of our local community through:
o increased lending (especially to support the growth of its
commercial loan portfolio);
o opportunistic branch expansion, either de novo or through
branch acquisitions;
o expansion of its financial and services; and
o increasing delivery systems, including the enhancement of
internet banking.
The reorganization and stock offering is also intended to provide an
additional source of capital to Westfield Financial in order to allow it to:
o finance acquisitions of other financial institutions or other
businesses related to banking;
o pay dividends to stockholders;
o repurchase shares of our common stock; or
o use proceeds for other general corporate purposes.
105
Westfield Mutual Holding Company also intends to organize a mid-tier
stock holding company to preserve its mutual form of ownership. The
reorganization will allow Westfield Mutual Holding Company to achieve certain
benefits of a stock company without a loss of control that is possible in a full
conversion from mutual to stock form. In a standard conversion, a newly
converted savings institution or its newly formed holding company sells 100% of
its common stock in a single stock offering. Retaining its mutual holding
company structure also allows Westfield Financial flexibility to issue its
common stock at various times and in varying amounts as market conditions
permit, rather than in a single stock offering. This makes the deployment of the
capital that we raise more manageable.
Additionally, after the reorganization, Westfield Financial will have
the ability to issue additional shares of common stock to raise capital or to
support mergers or acquisitions, although no additional capital issuance and no
mergers or acquisitions are planned or contemplated at the present time. In
addition, stock ownership by officers and other employees, through stock-based
benefit plans, has proven to be an effective performance incentive and an
effective means of attracting and retaining qualified personnel. We also believe
that the reorganization will provide local customers and other residents with an
opportunity to become equity owners of Westfield Financial, and thereby
participate in possible stock price appreciation and cash dividends. This is
consistent with our objective of being a locally-owned financial institution. We
believe that, through expanded local stock ownership, current customers and
non-customers who purchase common stock will seek to enhance the financial
success of Westfield Bank through consolidation of their banking business and
increased referrals to Westfield Bank.
The proceeds from the sale of common stock of Westfield Financial will
be invested to enhance Westfield Bank's profitability and facilitate growth.
Additionally, Westfield Bank's stronger capital position after the stock
offering will enhance operating flexibility, support desired expansion and
provide a cushion for absorbing unanticipated losses. Westfield Bank will
receive approximately 50% of the net proceeds of the reorganization and stock
offering as equity capital, to be used initially to invest in short-term
investments and adjustable rate mortgage-backed securities, then later for
making loans within Westfield Bank's market area. Westfield Financial will also
use a portion of the cash proceeds from the reorganization and stock offering to
extend a loan to the ESOP Trust, for use in purchasing shares of common stock
issued pursuant to the reorganization. The remainder of the proceeds will be
retained by Westfield Financial to repurchase common stock, pay dividends to
stockholders or for other general purposes. See "How We Intend to Use the
Proceeds from the Stock Offering" for a description of our intended use of
proceeds.
After considering the advantages and risks of the reorganization, as
well as applicable fiduciary duties, the Board of Trustees of Westfield Mutual
Holding Company and the Board of Directors of Westfield Bank unanimously
approved the reorganization and stock offering as being in the best interests of
Westfield Mutual Holding Company and Westfield Bank, Westfield Bank's depositors
and the communities that it serves. The plan of reorganization and minority
stock issuance was subsequently approved by the corporators of Westfield Mutual
Holding Company on October __, 2001.
106
Effects of the Reorganization
General. Each depositor of Westfield Bank has both a deposit account in
Westfield Bank and a pro rata ownership interest in the equity of Westfield
Mutual Holding Company based upon the balance in the depositor's account. This
interest may only be realized in the event of a liquidation of Westfield Mutual
Holding Company. However, this ownership interest is tied to the depositor's
account and has no tangible market value separate from the deposit account. Any
depositor who opens a deposit account obtains a pro rata ownership interest in
the equity of Westfield Mutual Holding Company without any additional payment
beyond the amount of the deposit. A depositor who reduces or closes his or her
account receives the balance in the account but receives nothing for his or her
ownership interest in the equity of Westfield Mutual Holding Company, which is
lost to the extent that the balance in the account is reduced. Consequently,
depositors of Westfield Bank have no way to realize the value of their ownership
interest in Westfield Mutual Holding Company, except in the unlikely event that
Westfield Mutual Holding Company is liquidated. If Westfield Mutual Holding
Company was liquidated, the depositors of record at that time would share pro
rata in any residual retained earnings and reserves after other claims,
including claims of depositors to the amounts of their deposits, are paid.
When a mutual institution converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's equity and the former pro rata ownership of depositors is
thereafter represented exclusively by their liquidation rights. This capital
stock is separate and apart from deposit accounts and cannot be and is not
insured by the FDIC or any other governmental agency. Certificates are issued to
evidence ownership of the capital stock. The stock certificates are
transferable, and, therefore, the stock may be sold or traded with no effect on
any deposit account the seller may hold in the institution.
Continuity. While the reorganization and stock offering is being
accomplished, and after its completion, the routine business of Westfield Bank
of accepting deposits and making loans will continue without interruption.
Westfield Bank will continue to be subject to regulation by the Division and the
FDIC. After the reorganization, Westfield Bank will continue to provide services
for depositors and borrowers under current policies by its management and staff.
The Board of Directors of Westfield Bank currently consists of 12
members, who also serve as trustees of Westfield Mutual Holding Company. After
the reorganization, these same directors will continue to serve on the Board of
Directors of Westfield Bank and will become the new Board of Directors of
Westfield Financial.
There will be no change in Westfield Bank's or Westfield Mutual Holding
Company's offices or staff as part of the reorganization. See "Management."
Deposit Accounts and Loans. The reorganization and stock offering will
not affect any deposit accounts or borrower relationships with Westfield Bank.
All deposit accounts in Westfield Bank will continue to be insured up to the
legal maximum by the Federal Deposit Insurance Corporation and the Depositors
Insurance Fund in the same manner as such deposit accounts were insured
immediately before the reorganization. The reorganization and stock offering
will not change the interest rate or the maturity of deposits at Westfield Bank.
107
Furthermore, all loans of Westfield Bank will retain the same status
that they had prior to the reorganization. The amount, interest rate, maturity
and security for each loan will remain as they were contractually fixed prior to
the reorganization.
Voting Rights. After the reorganization, direction of Westfield Bank
will continue to be under the control of the Board of Directors of Westfield
Bank. Westfield Financial, as the holder of all of the outstanding common stock
of Westfield Bank, will have exclusive voting rights with respect to any matters
concerning Westfield Bank requiring stockholder approval, including the election
of directors of Westfield Bank.
After the reorganization, the holders of the common stock of Westfield
Financial will have exclusive voting rights with respect to any matters
concerning Westfield Financial. These voting rights will be exclusive except to
the extent Westfield Financial in the future issues additional common stock or
preferred stock with voting rights. Each holder of common stock will be entitled
to vote on any matters to be considered by Westfield Financial's stockholders,
including the election of directors of Westfield Financial, subject to the
restrictions and limitations set forth in Westfield Financial's Articles of
Organization discussed below.
By virtue of its ownership of a majority of the outstanding shares of
common stock of Westfield Financial, Westfield Mutual Holding Company will be
able to elect all members of the Board of Directors of Westfield Financial and
generally will be able to control the outcome of most matters presented to
stockholders of Westfield Financial for resolution by vote. However, current
regulations and regulatory policies require that adoption of a stock option
plan, management recognition plan or second step reorganization of Westfield
Mutual Holding Company will be approved by a majority of the shares held by
public stockholders (i.e., all stockholders except Westfield Mutual Holding
Company).
Liquidation Rights. In the unlikely event of a complete liquidation of
Westfield Mutual Holding Company prior to the completion of the reorganization,
each depositor would receive a pro rata share of any assets of Westfield Bank
remaining after payment of expenses and satisfaction of claims of all creditors.
Each depositor's pro rata share of such liquidating distribution would be in the
same proportion as the value of such depositor's deposit account was to the
total value of all deposit accounts in Westfield Bank at the time of
liquidation.
Upon a complete liquidation of Westfield Bank after the reorganization,
each depositor would have a claim as a creditor of the same general priority as
the claims of all other general creditors of Westfield Bank. However, except as
described below, a depositor's claims would be solely for the amount of the
balance in such depositor's deposit account plus accrued interest. Such
depositor would not have an interest in the value or assets of Westfield Bank
above that amount. Instead, the holder of Westfield Bank's common stock (i.e.,
Westfield Financial) would be entitled to any assets remaining upon a
liquidation of Westfield Bank.
Upon a complete liquidation of Westfield Financial, each holder of
shares of common stock of Westfield Financial, including Westfield Mutual
Holding Company, would be entitled to receive a pro rata share of Westfield
Financial's assets, following payment of all debts, liabilities and claims of
greater priority of or against Westfield Financial, including the rights of
depositors in the liquidation account of Westfield Bank, if any.
108
If the liquidation of Westfield Mutual Holding Company occurs following
completion of the reorganization and stock offering, all depositors of Westfield
Bank at that time will be entitled pro rata to the value of their deposit
accounts and to a distribution of any assets of Westfield Mutual Holding Company
remaining after payment of all debts and claims of creditors.
We have no plans to liquidate Westfield Bank or Westfield Mutual
Holding Company in the future.
Tax Aspects. The reorganization and stock offering may be effected in
any manner approved by the Division of Banks that is consistent with the
purposes of the plan of reorganization and minority stock issuance and
applicable law, regulations and policies. It is intended that the reorganization
will be effected by having Westfield Mutual Holding Company establish Westfield
Financial as a stock subsidiary and transfer all outstanding capital stock of
Westfield Bank to Westfield Financial. The reorganization qualifies as an
exchange under section 351 of the Code. After the reorganization and stock
offering, Westfield Mutual Holding Company will own 47% of the issued and
outstanding stock of Westfield Financial. Westfield Financial will own 100% of
the issued and outstanding stock of Westfield Bank. There will be no change in
the structure of Westfield Bank, which will retain all of its historical tax
attributes.
Under the plan of reorganization and stock issuance, completion of the
reorganization and stock offering is conditioned upon, among other things, the
prior receipt by Westfield Bank and Westfield Mutual Holding Company of either a
private letter ruling from the IRS and from the Massachusetts taxing authorities
or an opinion of Thacher Proffitt & Wood as to the federal income tax
consequences and from Deloitte & Touche as to the Massachusetts income tax
consequences of the reorganization to Westfield Bank, Westfield Mutual Holding
Company, Westfield Financial, eligible account holders and supplemental eligible
account holders.
Based in part upon representations of Westfield Bank and Westfield
Mutual Holding Company, Thacher Proffitt & Wood has issued its opinion regarding
certain federal income tax consequences of the reorganization. With regard to
the reorganization, Thacher Proffitt & Wood has opined that:
(1) the transfer of the capital stock of Westfield Bank by
Westfield Mutual Holding Company to Westfield Financial solely
in exchange for the majority of the common stock of Westfield
Financial will be an exchange described in Code section 351.
(2) none of Westfield Bank, Westfield Mutual Holding Company or
Westfield Financial will recognize gain or loss as a result of
the reorganization; and
(3) eligible account holders and supplemental eligible account
holders will not recognize gain or loss upon their receipt of
nontransferable subscription rights to purchase shares of
Westfield Financial, provided the amount to be paid for such
shares is equal to fair market value of such shares.
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Unlike private rulings of the IRS, an opinion of counsel is not binding
on the IRS and the IRS could disagree with conclusions reached in the opinion.
If there is a disagreement, we can not guarantee that the IRS would not prevail
in a judicial or administrative proceeding.
Deloitte & Touche has opined, subject to the limitations and
qualifications in its opinion, that, for purposes of the Massachusetts corporate
income tax, the reorganization will not become a taxable transaction to
Westfield Bank, Westfield Mutual Holding Company, Westfield Financial, the
stockholders of Westfield Financial or the depositors of Westfield Bank.
Accounting Consequences. The reorganization will be accounted for at
historical cost in accordance with generally accepted accounting principles.
Accordingly, the carrying value of the assets, liabilities, and capital will be
unaffected by the reorganization and will be reflected in Westfield Financial's
consolidated financial statements based on their historical amounts.
How We Determined the Offering Range and the $10.00 Price Per Share
The plan of reorganization and minority stock issuance requires that
the purchase price of the common stock must be based on the appraised pro forma
market value of the common stock, as determined on the basis of an independent
valuation. Westfield Mutual Holding Company has retained RP Financial to make
the independent valuation. RP Financial's fees for its services in making such
appraisal are estimated to be $55,000. Neither Westfield Bank nor Westfield
Mutual Holding Company have had any prior business dealings with RP Financial.
Westfield Financial will indemnify RP Financial and its employees and affiliates
against losses (including any losses in connection with claims under the federal
securities laws) arising out of its services as appraiser, except where RP
Financial's liability results from its negligence or bad faith.
An appraisal has been made by RP Financial in reliance upon the
information contained in this prospectus, including the financial statements. RP
Financial also considered the following factors, among others:
o the present and projected operating results and financial
condition of Westfield Mutual Holding Company, and the
economic and demographic conditions in Westfield Bank's
existing market area;
o historical, financial and other information relating to
Westfield Bank;
o a comparative evaluation of the operating and financial
statistics of Westfield Mutual Holding Company with those of
other similarly situated savings associations and savings
institutions located in New England;
o the impact of the reorganization on Westfield Mutual Holding
Company's equity and earnings potential;
o dividends that may be paid by Westfield Financial; and
o the trading market for securities of comparable institutions
and general conditions in the market for such securities.
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On the basis of the foregoing, RP Financial has advised Westfield
Mutual Holding Company that, in its opinion, dated August 3, 2001, the
estimated pro forma market value of the common stock of Westfield Financial on a
fully converted basis ranged from a minimum of $68,000,000 to a maximum of
$92,000,000 with a midpoint of $80,000,000 (the estimated valuation range).
The Board of Trustees of Westfield Mutual Holding Company and the Board
of Directors of Westfield Bank held a joint meeting to review and discuss the
appraisal report prepared by RP Financial. Representatives of RP Financial
participated in the meeting to explain the contents of the appraisal report. The
Boards reviewed the methods that RP Financial used to determine the pro forma
market value of the common stock and the appropriateness of the assumptions that
RP Financial used in determining this value. The Boards have determined that the
common stock will be sold at $10.00 per share, which is the price most commonly
used in stock offerings involving converting savings institutions.
The Boards have approved the independent appraisal of RP Financial
which established an estimated valuation range of $31,960,000 to $43,240,000
with a midpoint of $37,600,000. Westfield Financial expects to issue between
3,760,000 and 4,324,000 shares of common stock in the stock offering. The
estimated valuation range and the offering range may be amended with the
approval of the Division and the Federal Reserve Board (if required), due to
subsequent developments in the financial condition of Westfield Mutual Holding
Company or Westfield Bank or market conditions generally.
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The valuation prepared by RP Financial is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. RP Financial did not independently verify the financial statements
and other information provided by Westfield Mutual Holding Company, nor did RP
Financial value independently the assets or liabilities of Westfield Mutual
Holding Company. The valuation considers Westfield Mutual Holding Company as a
going concern and should not be considered as an indication of the liquidation
value of Westfield Mutual Holding Company. Moreover, because such valuation is
necessarily based upon estimates and projections, all of which are subject to
change from time to time, no assurance can be given that persons purchasing such
shares in the reorganization and stock issuance will thereafter be able to sell
such shares at prices at or above the purchase price.
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The maximum of the estimated valuation range may be increased up to 15%
and the number of shares of common stock to be issued in the reorganization and
stock issuance may be increased to 4,972,600 shares due to regulatory
considerations, changes in the market and general financial and economic
conditions without the resolicitation of subscribers. See "Restrictions on
Transfer of Subscription Rights and Shares of Common Stock -Limitations on
Common Stock Purchases" as to the method of distribution and allocation of
additional shares that may be issued in the event of an increase in the
estimated valuation range.
We may not sell any shares of common stock unless RP Financial confirms
to Westfield Bank, Westfield Mutual Holding Company, the Division and the
Federal Reserve Board that, to the best of its knowledge, nothing of a material
nature has occurred which, taking into account all relevant factors, would cause
RP Financial to conclude that the appraisal report is
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incompatible with its estimate of the pro forma market value of the common stock
upon the conclusion of the stock offering.
If RP Financial concludes that the pro forma market value of the common
stock is either more than 15% above the maximum of the estimated valuation range
or less than the minimum of the estimated valuation range, Westfield Bank and
Westfield Mutual Holding Company, after consulting with the Division and the
Federal Reserve Board, may:
(1) terminate the plan of reorganization and minority stock
issuance and return all subscription funds promptly, paying
interest at Westfield Bank's passbook savings rate of interest
and cancel all account withdrawal authorizations;
(2) establish a new estimated valuation range and either:
(a) hold new subscription and community offerings; or
(b) provide subscribers the opportunity to change or
cancel their orders (a "resolicitation"); or
(3) take such other actions as permitted by the Division and the
Federal Reserve Board in order to complete the reorganization
and stock offering.
If a resolicitation is commenced, unless an affirmative response is received
from a subscriber within a designated period of time, all funds will be promptly
returned to the subscriber and account withdrawal authorizations canceled as
described above.
A copy of the appraisal report of RP Financial, including any
amendments made to it, and the detailed memorandum of the appraiser setting
forth the method and assumptions for such appraisal are available for inspection
at the main office of Westfield Bank.
Subscription Offering and Subscription Rights
In accordance with the plan of reorganization and minority stock
issuance, rights to subscribe for the purchase of common stock have been granted
to the following persons in the following order of priority:
(1) Eligible accounts holders. Depositors with deposits in
Westfield Bank with balances aggregating $50 or more
("qualifying deposit") as of December 31, 1999.
(2) Supplemental eligible account holders. Depositors with
qualifying deposits in Westfield Bank on December 31, 2000,
other than those depositors who would otherwise qualify as
eligible account holders and except for officers, directors,
trustees, corporators and their associates; and
(3) Tax-qualified employee stock benefit plans of Westfield Bank,
including the ESOP.
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All subscriptions received will be subject to the availability of common stock
after satisfaction of all subscriptions of all subscribers having prior rights
in the subscription offering and to the maximum and minimum purchase limitations
set forth in the plan of reorganization and minority stock issuance and as
described below under "Restrictions on Transfer of Subscription Rights and
Shares of Common Stock - Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each eligible account holder will
receive, as first priority and without payment, non-transferable rights to
subscribe for common stock in an amount of up to $300,000. See "Restrictions on
Transfer of Subscription Rights and Shares of Common Stock - Limitations on
Common Stock Purchases."
If there are not sufficient shares available to satisfy all
subscriptions by eligible account holders, shares first will be allocated so as
to permit each subscribing eligible account holder to purchase a number of
shares sufficient to make such eligible account holder's total allocation equal
to the lesser of 100 shares or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated among the remaining eligible account
holders whose subscriptions remain unfilled in the proportion that the amount of
their respective qualifying deposit bears to the total amount of qualifying
deposits of all eligible account holders whose subscriptions remain unfilled.
However, no fractional shares shall be issued.
To ensure a proper allocation of stock, each eligible account holder
must list on his or her stock order form all deposit accounts in which such
eligible account holder had an ownership interest at December 31, 1999. Failure
to list an account or providing incorrect information could result in the loss
of all or part of an allocation than if all accounts had been disclosed. The
subscription rights of eligible account holders who are also directors,
trustees, corporators or officers of Westfield Bank or Westfield Mutual Holding
Company or their associates will be subordinated to the subscription rights of
other eligible account holders to the extent attributable to increased deposits
in the one-year period preceding December 31, 1999.
Priority 2: Supplemental Eligible Account Holders. To the extent that
there are shares remaining after satisfaction of the subscriptions by eligible
account holders, each supplemental eligible account holder will receive, as a
second priority and without payment, non-transferable rights to subscribe for
common stock in an amount of up to $300,000. See "Restrictions on Transfer of
Subscription Rights and Shares of Common Stock - Limitations on Common Stock
Purchases."
If there are not sufficient shares available to satisfy all
subscriptions by supplemental eligible account holders, available shares first
will be allocated among subscribing supplemental eligible account holders so as
to permit each supplemental eligible account holder to purchase a number of
shares sufficient to make such supplemental eligible account holder's total
allocation equal to the lesser of 100 shares or the number of shares subscribed
for. Thereafter, unallocated shares will be allocated among the remaining
supplemental eligible account holders whose subscriptions remain unfilled in the
proportion that the amount of their respective qualifying deposit bears to the
total amount of qualifying deposits of all supplemental eligible account holders
whose subscriptions remain unfilled. However, no fractional shares shall be
issued.
To ensure proper allocation of stock, each supplemental eligible
account holder must list on his or her stock order form all deposit accounts in
which such supplemental eligible account
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holder had an ownership interest at December 31, 2000. Failure to list an
account or providing incorrect information could result in the loss of all or
part of an allocation.
Priority 3: The Tax-Qualified Employee Benefit Plans. On a third
priority basis, the tax-qualified employee benefit plans, including the ESOP,
will receive, as a third priority and without payment therefore,
non-transferable subscription rights to purchase up to 8% of the common stock to
be sold in the stock offering. As a tax-qualified employee benefit plan, the
ESOP expects to purchase 8% of the shares to be sold in the stock offering, or
255,680 shares, based on the issuance of 3,196,000 shares at the minimum of the
offering range or 345,920 shares based on the issuance of 4,324,000 shares at
the maximum of the offering range. Subscriptions by the ESOP will not be
aggregated with shares of common stock purchased directly by or which are
otherwise attributable to any other participants in the subscription and
community offerings, including subscriptions of any officers, directors,
trustees or corporators. It has not been determined whether the ESOP will
subscribe for shares in the stock offering or purchase shares in private
transactions or on the open market after completion of the stock offering.
Expiration Date for the Subscription Offering. The subscription
offering will expire at 12:00 noon, Massachusetts time, on ________, 2001,
unless we extend this period for up to 45 days. We may further extend this
period for additional 60 day periods with the approval of the Division and, if
necessary, the Federal Reserve Board. Subscription rights that have not been
exercised prior to the expiration date, as extended, will become void.
If all shares have not been subscribed for by the expiration date, as
extended, all funds delivered to Westfield Financial will be returned promptly
with interest at Westfield Bank's passbook savings rate and all withdrawal
authorizations will be canceled. If an extension beyond _______, 2001 is
granted, Westfield Financial will notify subscribers of the extension of time
and of their rights to change or cancel their orders. Each extension may not
exceed 60 days, and all extensions, in the aggregate, may not last beyond
________, 2002.
Persons in Non-qualified States or Foreign Countries. We will make
reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock pursuant to the
plan of reorganization and minority stock issuance reside. However, we are not
required to offer stock in the subscription offering to any person who resides
in a foreign country.
Direct Community Offering and Syndicated Community Offering
Direct Community Offering. To the extent that shares remain available
for purchase after satisfaction of all subscriptions received in the
subscription offering, Westfield Financial may offer shares for sale pursuant to
the plan of reorganization and minority stock issuance in a direct community
offering to the public with preference given to natural persons residing in
Westfield Bank's Community Reinvestment Act assessment area, which is comprised
of the municipalities of Agawam, Blandford, Chester, East Longmeadow, Granville,
Holyoke, Longmeadow, Montgomery, Russell, Springfield, Southhampton,Southampton, Southwick,
Tolland, Westfield and West Springfield. Persons will be deemed to reside in
these municipalities if they occupy a dwelling within these municipalities and
establish an ongoing physical presence within it, together with an
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indication that such presence is not merely transitory in nature. To the
extent the person is a corporation or other business entity, the principal
place of business or headquarters shall be in these municipalities. We may
utilize depositor or loan records or such other evidence provided to it to make
a determination as to whether a person is a resident. In all cases, the
determination of resident status will be made by us in our sole discretion.
Stock sold in the direct community offering will be offered and sold in a manner
to achieve the widest distribution of the stock. No person may purchase more
than $300,000 of common stock in the direct community offering. Allocation of
shares if an oversubscription occurs will give preference to natural persons
residing in the municipalities listed above. Orders accepted will each be filled
to a maximum percentage to be determined by us and not to exceed 2% of the total
offering or the purchase limitations in the plan. Thereafter remaining shares
will be allocated on an equal number of shares per order basis.
The direct community offering, if any, may commence concurrently with
or subsequent to the commencement of the subscription offering and shall
terminate no later than 45 days after the expiration of the subscription
offering unless extended by Westfield Financial, with the approval of the
Division and the Federal Reserve Board, if necessary. We may terminate the
direct community offering or the syndicated community offering as soon as we
have received orders for at least the minimum number of shares available for
purchase in the stock offering.
Syndicated Community Offering. If any stock remains unsold in the
subscription and direct community offerings, we may use the services of
broker-dealers to sell such shares on a best efforts basis in a syndicated
community offering to be managed by Keefe, Bruyette & Woods, Inc. No person may
purchase more than $300,000 of common stock in the syndicated community
offering.
Keefe, Bruyette & Woods, Inc., has not selected any particular
broker-dealers to participate in a syndicated community offering. Neither Keefe,
Bruyette & Woods, Inc. nor any registered broker-dealer shall have any
obligation to take or purchase any shares of the common stock in the syndicated
community offering. However, Keefe, Bruyette & Woods, Inc. has agreed to use its
best efforts in the sale of shares in any syndicated community offering.
The syndicated community offering may commence during the direct
community offering, if any, or after the direct community offering is
terminated. The syndicated community offering will terminate no more than 45
days following the expiration of the subscription offering unless extended by
Westfield Financial with the approval of the Division and Federal Reserve Board.
Such extensions may not be beyond _______, 2003.
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The opportunity to subscribe for shares of common stock in the direct community
offering or syndicated community offering is subject to our right, in our sole
discretion, to accept or reject any order in whole or in part either at the time
of receipt of an order or as soon as practicable following the expiration date.
If we reject a subscription in part, the subscriber will not have the right to
cancel the remainder of the subscription.
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If for any reason a syndicated community offering of unsubscribed
shares cannot be effected or is not deemed advisable, we will seek to make other
arrangements, subject to the approval of the Division and the Federal Reserve
Board and to compliance with applicable state and federal securities laws.
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Marketing Arrangements
Keefe, Bruyette & Woods, Inc. We have engaged Keefe, Bruyette & Woods,
Inc. as financial advisor and marketing agent in connection with the stock
offering. Keefe, Bruyette & Woods, Inc. has agreed to use its best efforts to
assist us with the solicitation of subscriptions for shares of common stock in
the stock offering.
Keefe, Bruyette & Woods, Inc. will receive fees for services provided
in connection with the stock offering equal to 1.5% of the aggregate purchase
price of shares sold in the subscription offering and direct community offering,
excluding shares sold to the ESOP (or other similar plan) and any corporators,
trustees, directors, officers, or employees of Westfield Bank or Westfield
Mutual Holding Company. If there is a syndicated community offering, we will
also pay Keefe, Bruyette & Woods, Inc. a fee equal to 5.5% of the aggregate
purchase price of common stock sold in the syndicated community offering which
fee, along with fees payable by us to any broker-dealers including Keefe,
Bruyette & Woods, Inc., for the shares they sell, will not exceed 5.5% of the
aggregate purchase price of the common stock sold in the syndicated community
offering. Keefe, Bruyette & Woods, Inc. will receive a management fee of $25,000
for services provided in connection with the stock offering, which shall be
applied against the 1.5% fee for services, and will be reimbursed for its
reasonable out-of-pocket expenses, of up to $15,000 and legal fees of up to
$35,000.
The following table sets forth the per share and total commissions and
expenses to be paid to Keefe, Bruyette & Woods, Inc. by us at each level of the
offering range (assuming all shares are sold in the subscription offering or
direct community offering).
Minimum Midpoint Maximum Super-maximum
---------- ---------- ------------ -------------
Commissions:
Per share total..................... $ 0.13 $ 0.13 $ 0.13 $ 0.13
Total commissions................... 408,048 485,880 563,712 653,219
Expenses............................ 50,000 50,000 50,000 50,000
---------- ---------- ------------ ------------
Total........................... 458,048 535,880 613,707 703,219
========== ========== ============ ============
Directors/Trustees and Employees. Directors and executive officers of
Westfield Financial and Westfield Bank and trustees and executive officers of
Westfield Mutual Holding Company may participate in the solicitation of offers
to purchase common stock. Other employees of Westfield Bank may participate in
the stock offering in ministerial capacities or provide clerical work in
effecting a sales transaction. Such other employees have been instructed not to
solicit offers to purchase common stock or provide advice regarding the purchase
of common stock. Westfield Financial will rely on Rule 3a4-1 under the Exchange
Act, and sales of common stock will be conducted within the requirements of Rule
3a4-1, so as to permit directors, officers and employees to participate in the
sale of common stock. No director or trustee, as the case may be, or employee of
Westfield Financial, Westfield Mutual Holding Company or Westfield Bank will be
compensated in connection with his or her participation by the payment of
commissions or other remuneration based either directly or indirectly on
transactions in common stock.
Procedure for Purchasing Shares in Subscription and Direct Community Offerings
Use of Order Forms. To purchase shares in the subscription offering and
the direct community offering, an executed order form with the required payment
for each share subscribed for, or with appropriate authorization for withdrawal
from a subscriber's deposit accounts at Westfield Bank (which must be given by
completing the appropriate blanks on the stock order form), must be received by
Westfield Bank by 12:00 noon, Massachusetts time, on the indicated expiration
date unless extended. You may submit your order form by mail using the return
envelope provided or by overnight courier to the indicated address, or by
bringing your order forms to our Stock Information Center in our main office or
at any branch office. Stock order forms that are not received by such time or
are executed defectively or are received without full
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payment (or correct withdrawal instructions) are not required to be accepted.
In addition, we are not obligated to accept orders submitted on photocopied
or facsimiled order forms. We have the power to waive or permit the correction
of incomplete or improperly executed forms, but do not represent that
we will do so. Once received, an executed order form may not be modified,
amended or rescinded without our consent unless the reorganization and stock
issuance has not been completed within 45 days of the end of the subscription
offering or we conduct a resolicitation of subscribers for some other reason. If
resolicitation is commenced, subscribers will have an opportunity to change or
cancel their orders. Unless an affirmative response is received from a
subscriber within a designated timeframe, all funds will be promptly returned to
the subscriber with interest at Westfield Bank's passbook-savings rate and all
account withdrawal authorizations will be canceled.
In order to ensure that eligible account holders and supplemental
eligible account holders are properly identified as to their stock purchase
eligibility, depositors must list on the stock order form all deposit accounts
as of the applicable eligibility record date giving all names on each account
and the account numbers.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the expiration date for the stock offering, in accordance with Rule
15c2-8 of the Exchange Act, no prospectus will be mailed later than five days
prior to such date or hand delivered any later than two days prior to such date.
Execution of the stock order form will confirm receipt or delivery in accordance
with Rule15c2-8. Order forms will only be distributed when preceeded or
accompanied by a prospectus.
Payment for Shares. Payment for subscriptions may be made by personal
check, bank check, money order or by authorization of withdrawal from your
current deposit accounts which do not have check-writing privileges maintained
at Westfield Bank. Interest will be paid on payments made by check, bank check
or money order at Westfield Bank's passbook savings rate of interest from the
date payment is received until the completion or termination of the
reorganization. If payment is made by authorization of withdrawal from deposit
accounts, the funds authorized to be withdrawn will remain in the account and
continue to accrue interest at the contractual rates until completion or
termination of the reorganization, but a hold immediately will be placed on such
funds, thereby making them unavailable to the depositor. Wire transfers will
only be accepted into accounts which do not have check-writing privileges,
whereupon an order form may authorize withdrawal from this account.
Westfield Bank will waive any applicable penalties for early withdrawal
from certificates of deposit. If the remaining balance in a certificate account
is reduced below the applicable minimum balance requirement at the time that the
funds are transferred under the authorization, the certificate will be canceled
at the time of the withdrawal, without penalty, and the remaining balance will
be converted into a statement savings account and will earn interest at the
passbook savings rate.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes. Rather, the ESOP may pay for such shares of common stock
subscribed for at the purchase price upon completion of the stock offering;
provided, that there is in force from the time of its subscription until such
time, a loan commitment acceptable to Westfield Financial from an unrelated
financial institution or from Westfield Financial to lend to the ESOP the
117
aggregate purchase price of the shares for which it subscribed. Westfield
Financial intends to provide such a loan to the ESOP.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of common stock in the subscription and community offerings,
provided that such IRAs are not maintained at Westfield Bank. Persons with IRAs
maintained at Westfield Bank must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of common stock in the
subscription and community offerings. In addition, the provisions of ERISA and
IRS regulations require that officers, trustees and ten percent stockholders who
use self-directed IRA funds to purchase shares of common stock in the
subscription and community offerings make such purchases for the exclusive
benefit of the IRAs. Assistance on how to transfer IRAs maintained at Westfield
Bank can be obtained from the Stock Information Center. Depositors interested in
using funds in an IRA to purchase common stock should contact the Stock
Information Center as soon as possible.
Certificates representing shares of common stock purchased will be
mailed to purchasers to the addresses specified in properly completed order
forms, as soon as practicable following completion of the stock offering. Any
certificates returned as undeliverable will be disposed of in accordance with
applicable law.
Stock Information Center
If you have any questions regarding the stock offering or the
reorganization, please call the Stock Information Center at _________,(413) 562-5163,
from 9:00 a.m. to 4:00 p.m., Massachusetts time, Monday through Friday.
Restrictions on Transfer of Subscription Rights
and Shares of Common Stock
Regulations prohibit any person with subscription rights from
transferring or entering into any agreement or understanding to transfer the
legal or beneficial ownership of the subscription rights issued under the plan
of reorganization and minority stock issuance or the shares of common stock to
be issued upon their exercise. Such rights may be exercised only by the person
to whom they are granted and only for such person's account. Each person
exercising such subscription rights will be required to certify that such person
is purchasing shares solely for such person's own account and that such person
has no agreement or understanding regarding the sale or transfer of such shares.
The regulations also prohibit any person from offering or making an announcement
of an offer or an intent to make an offer to purchase such subscription rights
or shares of common stock prior to the completion of the reorganization and
stock offering.
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We will pursue any and all legal and equitable remedies (including forfeiture)
in the event we become aware of the transfer of subscription rights and will not
honor orders known by us to involve the transfer of such rights.
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Limitations on Common Stock Purchases
The plan of reorganization and minority stock issuance includes the
following limitations on the number of shares of common stock that may be
purchased during the reorganization and stock offering:
(1) No subscription for fewer than 25 shares will be accepted;
(2) No fractional shares will be allocated or issued;
(3) Purchasers in the subscription offering may subscribe for and
purchase common stock in the subscription offering in an
amount up to $300,000, subject to increase as described below;
(4) The tax-qualified employee benefit plans are permitted to
purchase up to 8% of the shares of common stock sold in the
stock offering and, as a tax-qualified employee benefit plan,
the ESOP intends to purchase 8% of the shares of common stock
sold in the stock offering;
(5) The officers, directors, trustees and corporators of Westfield
Bank or Westfield Mutual Holding Company and their associates
in the aggregate, excluding purchases by the tax-qualified
employee benefit plans, may purchase up to 25% of the shares
of stock issued in the stock offering. Each officer, director,
trustee or corporator will be subject to the same purchase
limitations as eligible account holders and supplemental
eligible account holders;
(6) Persons purchasing shares of common stock in the direct
community offering or the syndicated community offering, may
purchase common stock in an amount up to $300,000, subject to
increase as described below; and
(7) Except for the tax-qualified employee benefit plans, the
maximum amount of shares of common stock purchased in all
categories of the stock offering by any person, together with
associates of, and groups of person acting in concert with,
such person, shall not exceed $500,000, subject to increase as
described below.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the $300,000 and $500,000 maximum amounts may
be altered by Westfield Mutual Holding Company and Westfield Bank, in their sole
discretion and without further notice to or solicitation of subscribers or other
prospective purchasers, to the following amounts: (i) increased to a maximum of
5% of the shares offered in the stock offering, exclusive of an increase in the
total number of shares issued due to an increase in the offering range of up to
15%, or up to 4,972,600 shares, or (ii) decreased to not less than one-tenth of
a percent (.10%) of the number of shares of stock offered in the reorganization
and stock offering. If the purchase limitations are increased, subscribers for
the maximum amount in the subscription offering will be given the opportunity to
increase their subscriptions up to the then applicable limit. Requests to
purchase additional shares of common stock under this provision will be
determined by and in the sole discretion of the Board of Directors of Westfield
Bank and the Board of Trustees of Westfield Mutual Holding Company and, if
necessary, allocated giving priority in accordance
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with the priorities set forth in the plan of reorganization and minority stock
issuance and described in this prospectus.
If we sell more than 4,972,600 shares, the additional shares will be
allocated in accordance with the priorities and procedures described in "The
Reorganization and the Stock Offering -Subscription Offering and Subscription
Rights" and "The Reorganization and the Stock Offering -Direct Community
Offering and Syndicated Community Offering."
The term "associate" of a person is defined to mean:
(1) any corporation or organization (other than Westfield
Financial, Westfield Mutual Holding Company, Westfield Bank or
a majority-owned subsidiary of Westfield Bank) of which such
person is a director, officer or partner or is directly or
indirectly, the beneficial owner of 10% or more of any class
of equity securities;
(2) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity; and
(3) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a
director, trustee or officer of Westfield Financial, Westfield
Mutual Holding Company, Westfield Bank or any subsidiary of
Westfield Bank or Westfield Financial or any affiliate
thereof; and
(4) any person "acting in concert" with any of the persons or
entities specified in clauses (1) through (3) above; provided,
however, that any tax-qualified or non-tax-qualified employee
plan will not be deemed to be an associate of any director,
trustee or officer of Westfield Bank, Westfield Mutual Holding
Company or Westfield Financial, for purposes of aggregating
total shares that may be acquired or held by directors,
trustees and officers and their associates.
Westfield Mutual Holding Company has the sole discretion to determine
whether prospective purchasers are "associates" or "acting in concert."
Trustees, directors, corporators and officers are not treated as associates of
each other solely by virtue of holding such positions.
We have the right in our sole discretion to reject any order submitted
by a person whose representations we believe to be false or who we otherwise
believe, either alone or acting in concert with others, is violating or
circumventing, or intends to violate or circumvent, the terms and conditions of
the plan of reorganization and minority stock issuance.
Restrictions on Purchase or Transfer of Shares After the Reorganization
All shares of common stock purchased in connection with the
reorganization and minority stock issuance by an officer or director of
Westfield Bank or Westfield Financial or an officer, trustee or corporator of
Westfield Mutual Holding Company, or any of their associates, will be subject to
a restriction that the shares not be sold for a period of one year following the
date of purchase, except in the event of the death or the Division's declaration
of incompetence of such trustee, director, officer or corporator. Each
certificate for restricted shares will bear a legend giving notice of this
restriction on transfer, and instructions will be issued to the effect
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that the transfer agent for Westfield Financial is to disregard any such
attempted transfer. The directors and executive officers of Westfield
Financial and Westfield Bank will also be subject to the federal insider trading
rules and any other applicable requirements of the federal securities laws.
Purchases of outstanding shares of common stock of Westfield Financial
by directors, trustees, corporators or officers of Westfield Mutual Holding
Company, Westfield Financial or Westfield Bank (and any person who was a
director or officer of Westfield Bank; a trustee, corporator or officer of
Westfield Mutual Holding Company or a director or officer of Westfield Financial
at any time after the date on which the Board of Directors of Westfield Bank and
the Board of Directors of Westfield Mutual Holding Company adopted the plan of
reorganization), and their associates during the three-year period following
completion of the reorganization may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the Division.
This restriction does not apply, however, to negotiated transactions involving
more than 1% of the outstanding common stock, or purchases of common stock made
and held by any tax-qualified or non-tax-qualified employee plan of Westfield
Bank or Westfield Financial. In addition, for a period of three years following
the completion of the reorganization, no officer, director, trustee or
corporator of Westfield Bank, Westfield Mutual Holding Company, Westfield
Financial or any of their associates may, without prior written approval from
the Division, purchase capital stock of Westfield Financial.
Interpretation, Amendment and Termination
All interpretations of the plan of reorganization and minority stock
issuance by the Board of Trustees of Westfield Mutual Holding Company and the
Board of Directors of Westfield Bank will be final, subject to the authority of
the Division and Federal Reserve Board. The plan of reorganization and minority
stock issuance provides that, if deemed necessary or desirable by the Board of
Trustees of Westfield Mutual Holding Company, the plan of reorganization and
minority stock issuance may be substantively amended by a majority vote of the
Boards as a result of comments from regulatory authorities or otherwise, at any
time prior to the date material is sent to the corporators for approval of the
plan. Amendment of the plan of reorganization and minority stock issuance
thereafter requires a majority vote of the Boards and the approval of the
Division. The plan of reorganization shall be terminated if the reorganization
and stock offering is not completed within 24 months from the date on which the
Board of Trustees of Westfield Mutual Holding Company and the Board of Directors
of Westfield Bank approved the plan. The plan of reorganization and minority
stock issuance may be terminated by a majority vote of the Board of Trustees of
Westfield Mutual Holding Company at any time prior to the date of the special
meeting of corporators called to consider this plan, and thereafter by such a
vote with the approval of the Division.
Possible Conversion of Westfield Mutual Holding Company to Stock Form
Federal and state regulations permit Westfield Mutual Holding Company
to convert from mutual to stock form. Such a transaction is commonly known as a
"second-step conversion." There can be no assurance when, if ever, a second-step
conversion will occur, and the Board of Trustees has no current intention or
plan to undertake a second-step conversion. If a second-step
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conversion does not occur, Westfield Mutual Holding Company will always own
a majority of the common stock of Westfield Financial. The Board of Trustees
of Westfield Mutual Holding Company and the Board of Directors of Westfield
Financial will not undertake a second-step conversion for three years following
the stock offering, unless compelling and valid business reasons exist to do so.
In a second-step conversion, Westfield Mutual Holding Company would
merge with and into Westfield Bank or Westfield Financial, with Westfield Bank
or Westfield Financial as the resulting entity. Certain depositors of Westfield
Bank would receive the right to subscribe for additional shares of Westfield
Financial. The additional shares of common stock of the holding company issued
in the second-step conversion would be sold at their aggregate pro forma market
value.
In a second-step conversion, each share of common stock outstanding
immediately prior to the completion of the second-step conversion held by
persons other than Westfield Mutual Holding Company would be automatically
converted into and become the right to receive a number of shares of common
stock of Westfield Financial determined pursuant to an exchange ratio. This
exchange ratio would ensure that after the second-step conversion, subject to
the adjustments described below (if required by the applicable banking
regulators) and any adjustment to reflect the receipt of cash in lieu of
fractional shares, the percentage of the to-be-outstanding shares of the
resulting entity issued to stockholders other than Westfield Mutual Holding
Company in exchange for their common stock would be equal to the percentage of
the outstanding shares of common stock held by public stockholders immediately
prior to the second-step conversion.
The percentage of the to-be-outstanding shares of the resulting entity
issued in exchange for public shares would be adjusted to reflect the aggregate
amount of dividends waived by Westfield Mutual Holding Company, if any, and the
market value of the assets Westfield Mutual Holding Company, other than common
stock of Westfield Financial. Pursuant to this adjustment, the percentage of the
to-be-outstanding shares of the resulting entity issued to public stockholders
in exchange for their minority shares (the "Adjusted Minority Ownership
Percentage") is equal to the percentage of the outstanding shares of common
stock held by public stockholders multiplied by the dividend waiver fraction.
The dividend waiver fraction is equal to the product of:
(1) a fraction, of which the numerator is equal to Westfield
Financial's stockholders' equity at the time of the
second-step conversion less the aggregate amount of dividends
waived by Westfield Mutual Holding Company, and the
denominator is equal to Westfield Financial's stockholders'
equity at the time of the second-step conversion, and
(2) a fraction, of which the numerator is equal to the appraised
pro forma market value of the resulting entity in the
second-step conversion minus the value of Westfield Mutual
Holding Company assets other than common stock and the
denominator is equal to the appraised pro forma market value
of the resulting entity in the second-step conversion.
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Under this calculation, the percentage of common stock of the resulting
entity issued to public stockholders will decrease each time, if ever, Westfield
Mutual Holding Company waives the receipt of dividends declared by Westfield
Financial. If Westfield Mutual Holding Company waives the receipt of dividends
over a period of time, the aggregate amount of waived dividends will increase in
the aggregate. However, the extent to which such waived dividends reduce the
ownership interest of public stockholders in the event of any future second-step
conversion will depend on many factors, including Westfield Financial's dividend
policy, the amount of dividends paid, whether Westfield Mutual Holding Company
waives the receipt of dividends, and the results of operations of Westfield Bank
during this period.
Restrictions on Acquisition of Westfield Financial
and Westfield Bank
General
The plan of reorganization and minority stock issuance provides for
Westfield Mutual Holding Company to organize Westfield Financial, a stock
holding company that will own 100% of the stock of Westfield Bank. See "The
Reorganization and the Stock Offering - General." Provisions in Westfield
Financial's Articles of Organization and Bylaws and in its benefit plans and
agreements entered into in connection with the reorganization, together with
provisions of the Massachusetts General Laws and governing regulatory
restrictions, may have anti-takeover effects.
Westfield Financial's Articles of Organization and Bylaws
Westfield Financial's Articles of Organization and Bylaws contain a
number of provisions, relating to corporate governance and rights of
stockholders, that might discourage future takeover attempts. As a result,
stockholders who might desire to participate in such transactions may not have
an opportunity to do so. In addition, these provisions will also render the
removal of the Board of Directors or management of Westfield Financial more
difficult.
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The following description is a summary of the provisions of the Articles of
Organization and Bylaws. See "Where You Can Find Additional Information" as to
how to review a copy of these documents.
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Directors. Certain provisions of Westfield Financial's Articles of
Organization and Bylaws will impede changes in control of the Board of
Directors. Westfield Financial's Articles of Organization provide that the Board
of Directors will be divided into three classes, with directors in each class
elected for three-year staggered terms except for the initial directors. Thus,
it would take two annual elections to replace a majority of Westfield
Financial's Board. Westfield Financial's Articles of Organization provide that
the size of the Board of Directors may be increased or decreased only by a
majority vote of the Board. The Articles of Organization also provide that any
vacancy occurring in the Board of Directors, including a vacancy created by an
increase in the number of directors, shall be filled for the remainder of the
unexpired term by a majority vote of the directors then in office. Finally, the
Articles of Organization and Bylaws impose notice and information requirements
in connection with the
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nomination by stockholders of candidates for election to the Board of Directors
or the proposal by stockholders of business to be acted upon at an annual
meeting of stockholders.
The Articles of Organization provide that a director may only be
removed for cause by the affirmative vote of either two-thirds of the authorized
Board of Directors of Westfield Financial, or 80% of the shares eligible to
vote. In the absence of these provisions, the vote of the holders of a majority
of the shares of Westfield Financial could remove the entire Board, with or
without cause, and replace it with persons of such holders' choice.
Restrictions on Call of Special Meetings. The Articles of Organization
provide that a special meeting of stockholders may be called by a majority of
the authorized Board of Directors of Westfield Financial or the affirmative vote
of a majority of the disinterested directors then in office, or, upon written
application, by stockholders holding at least 80% of the capital stock entitled
to vote at the meeting.
Votes of Stockholders. The Articles of Organization prohibit cumulative
voting for the election of directors. No cumulative voting means that the
directors, officers and employees of Westfield Bank and the former trustees,
officers and employees of Westfield Mutual Holding Company may have the power to
elect all directors of Westfield Financial to be elected at that meeting. This
could prevent public stockholder representation on Westfield Financial's Board
of Directors. In addition, the Articles of Organization also provides that any
action required or permitted to be taken by the stockholders of Westfield
Financial may be taken only at an annual or special meeting and prohibits
stockholder action by written consent in lieu of a meeting.
Authorization of Preferred Stock. The Articles of Organization
authorize 5,000,000 shares of serial preferred stock, par value $0.01 per share.
Westfield Financial is authorized to issue preferred stock from time to time in
one or more series subject to applicable provisions of law, and the Board of
Directors is authorized to fix the designations, and relative preferences,
limitations, voting rights, if any, including without limitation, offering
rights of such shares (which could be multiple or as a separate class). In the
event of a proposed merger, tender offer or other attempt to gain control of
Westfield Financial that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede that completion of
the transaction. An effect of the possible issuance of preferred stock,
therefore may be to deter a future attempt to gain control of Westfield
Financial. The Board of Directors has no present plan or understanding to issue
any preferred stock.
Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders. The Articles of Organization requires the approval of
the holders of at least 80% of Westfield Financial's outstanding shares of
voting stock to approve certain "Business Combinations" and related
transactions.
The vote of at least 80% of the stockholders is required in connection
with any transaction involving an Interested Stockholder except in cases where
the proposed transaction has been approved in advance by a majority of those
members of Westfield Financial's Board of Directors who are unaffiliated with
the Interested Stockholder and were directors prior to the time when the
Interested Stockholder became an Interested Stockholder. However, if the
proposed transaction meets the conditions set forth in the Articles of
Organization designed to
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afford the stockholders a fair price in consideration for their shares,
approval of only two-thirds of the outstanding shares of voting stock would be
sufficient.
The term "Interested Stockholder" is defined to include, among others,
any individual, corporation, partnership or other entity (other than Westfield
Bank, Westfield Financial or its subsidiary or any employee benefit plan
maintained by Westfield Financial or its subsidiary) which owns beneficially or
controls, directly or indirectly, more than 5% of the outstanding shares of
voting stock of Westfield Financial.
A "Business Combination" means:
(1) any merger or consolidation of Westfield Financial or any of
its subsidiaries with or into any Interested Stockholder or
its affiliate;
(2) any sale, lease, exchange, mortgage, pledge, transfer, or
other disposition to or with any Interested Stockholder or its
affiliate of 25% or more of the assets of Westfield Financial
or combined assets of Westfield Financial and its subsidiary;
(3) the issuance or transfer to any Interested Stockholder or its
affiliate by Westfield Financial (or any subsidiary) of any
securities of Westfield Financial in exchange for cash,
securities or other property having an aggregate fair market
value equaling or exceeding 25% of the combined fair market
value of the outstanding common stock of Westfield Financial
and its subsidiaries, except for any issuance or transfer
under an employee benefit plan of Westfield Financial or any
subsidiary;
(4) the adoption of any plan for the liquidation or dissolution of
Westfield Financial proposed by or on behalf of any Interested
Stockholder or its affiliate; and
(5) any reclassification of securities, recapitalization, merger
or consolidation of Westfield Financial which has the effect
of increasing the proportionate share of common stock or any
class of equity or convertible securities of Westfield
Financial owned directly or indirectly by an Interested
Stockholder or its affiliate.
Evaluation of Offers. The Articles of Organization further provides
that the Board of Directors of Westfield Financial shall when evaluating any
offer to Westfield Financial from another party to:
o make a tender offer or exchange offer for any outstanding
equity security of Westfield Financial;
o merge or consolidate Westfield Financial with another
corporation or entity; or
o purchase or otherwise acquire all or substantially all of the
properties and assets of Westfield Financial;
in connection with the exercise of its judgment in determining what is in the
best interest of Westfield Financial and its stockholders, give due
consideration to the extent permitted by law to all relevant factors, including,
without limitation, Westfield Financial's employees, suppliers,
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creditors and customers; the economy of the state, region and nation; community
and societal considerations; and the long- and short-term interests of Westfield
Financial and its stockholders, including the possibility that these interests
will be best served by the continued independence of Westfield Financial.
By having these standards in the Articles of Organization of Westfield
Financial, the Board of Directors may be in a stronger position to oppose such a
transaction if the Board concludes that the transaction would not be in the best
interests of Westfield Financial, even if the price offered is significantly
greater than the then market price of any equity security of Westfield
Financial.
Amendment to Articles of Organization and Bylaws. The Articles of
Organization may be amended by the affirmative vote of 80% of the total votes
eligible to be cast by stockholders, voting together as a single class;
provided, however, that if at least two-thirds of the Directors recommend
approval of the amendment, then such amendment shall require the affirmative
vote of a majority of the total votes eligible to cast by stockholder, voting
together as a single class.
The Bylaws may be amended by the affirmative vote of two-thirds of the
Board of Directors of Westfield Financial or the affirmative vote of at least
80% of the total votes eligible to be cast by stockholders, voting together as a
single class. These provisions could have the effect of discouraging a tender
offer or other takeover attempt where the ability to make fundamental changes
through Bylaw amendments is an important element of the takeover strategy of the
acquiror.
Anti-Takeover Effects of Westfield Financial's Articles of Organization, Bylaws
and Benefit Plans Adopted in the Reorganization
The provisions described above are intended to reduce Westfield
Financial's vulnerability to takeover attempts and other transactions that have
not been negotiated with and approved by members of its Board of Directors. The
provisions of the employment agreements, the management recognition plan and the
stock option plan to be established may also discourage takeover attempts by
increasing the costs to be incurred by Westfield Bank and Westfield Financial in
the event of a takeover. See "Management - Employment Agreements," and "-
Benefits."
Westfield Financial's Board of Directors believes that the provisions
of the Articles of Organization, Bylaws and benefit plans to be established are
in the best interests of Westfield Financial and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of Westfield Financial and its
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts. It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a merger
or other transaction at a price that reflects the true value of Westfield
Financial and that otherwise is in the best interests of all stockholders.
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Regulatory Restrictions
Federal Change in Bank Control Act. Federal law provides that no
person, acting directly or indirectly or through or in concert with one or more
other persons, may acquire control of a bank unless the FDIC has been given 60
days prior written notice. For this purpose, the term "control" means the
acquisition of the ownership, control or holding of the power to vote 25% or
more of any class of a bank holding company's voting stock, and the term
"company" includes an individual, corporation, partnership, and various other
entities, acting individually or in concert. In addition, an acquiring person is
presumed to acquire control if the person acquires the ownership, control or
holding of the power to vote of 10% or more of any class of the holding
company's voting stock if (a) Westfield Financial's shares are registered under
Section 12 of the Exchange Act or (b) no other person will own, control or hold
the power to vote a greater percentage of that class of voting securities. The
Federal Reserve Board is authorized by the change in bank control act and its
own regulations to disapprove a proposed transaction on certain specified
grounds. Accordingly, the prior approval of the Federal Reserve Bank would be
required before any person could acquire 10% or more of the Common Stock of
Westfield Financial.
Federal Bank Holding Company Act. Federal law provides that no company
may acquire control of a bank holding company without the prior approval of the
Federal Reserve. Any company that acquires control becomes a "bank holding
company" subject to registration, examination and regulation by the Federal
Reserve. Under federal regulations, the term "company" is defined to include
banks, corporations, partnerships, associations, and certain trusts and other
entities, and the term "control" is deemed to exist if a company has voting
control of at least 25% of any class of a bank's voting stock, and may be found
to exist if a company controls in any manner the election of a majority of the
directors of the bank or has the power to exercise a controlling influence over
the management or policies of the bank. In addition, a bank holding company must
obtain Federal Reserve Board approval prior to acquiring voting control of more
than 5% of any class of voting stock of a bank or another bank holding company.
The foregoing restrictions do not apply to the acquisition of stock by one or
more tax-qualified employee stock benefit plans, provided that the plan or plans
do not have beneficial ownership in the aggregate of more than 25 percent of any
class of our equity security.
An acquisition of control of a bank that requires the prior approval of
the Federal Reserve Board under the Bank Holding Company Act is not subject to
the notice requirements of the Change in Bank Control Act. Accordingly, the
prior approval of the Federal Reserve Board under the Bank Holding Company Act
would be required (a) before any bank holding company could acquire 5% or more
of the common stock of Westfield Financial and (b) before any other company
could acquire 25% or more of the common stock of Westfield Financial.
The Federal Reserve may prohibit an acquisition of control if:
(1) it would result in a monopoly or substantially lessen
competition;
(2) the financial condition of the acquiring person might
jeopardize the financial stability of the institution; or
127
(3) the competence, experience or integrity of the acquiring
person indicates that it would not be in the interest of the
depositors or of the public to permit the acquisition of
control by such person.
Massachusetts Banking Law. Massachusetts banking law also prohibits any
"company," defined to include banking institutions as well as corporations, from
directly or indirectly controlling the voting power of 25% or more of the voting
stock of two or more banking institutions without the prior approval of the
Board of Bank Incorporation. Additionally, an out-of-state company which already
directly or indirectly controls voting power of 25% or more of the voting stock
of two or more banking institutions may not also acquire direct or indirect
ownership or control of more than 5% of the voting stock of a Massachusetts
banking institution without the prior approval of the Board of Bank
Incorporation.
Finally, for a period of three years following completion of the
reorganization, no person may directly or indirectly offer to acquire or acquire
beneficial ownership of more than 10% of any class of equity security of a
Westfield Financial without prior written approval of the Division.
Description of Capital Stock of
Westfield Financial
General
Westfield Financial is authorized to issue 25 million (25,000,000)
shares of common stock having a par value of $.01 per share and 5 million
(5,000,000) shares of preferred stock having a par value of $.01 per share.
Westfield Financial currently expects to sell 4,324,000 shares of common stock
(or 4,972,600 shares of common stock in the event of an increase of 15% in the
Estimated Valuation Range) to purchasers of common stock in the stock offering.
Westfield Financial will not issue any shares of preferred stock in the stock
offering. Except as discussed above in "Restrictions on Acquisition of Westfield
Financial and Westfield Bank," each share of Westfield Financial's common stock
will have the same relative rights as, and will be identical in all respects
with, every other share of common stock. Upon payment of the purchase price for
the common stock sold in accordance with the plan of reorganization, all such
stock will be duly authorized, fully paid and non-assessable.
The shares of common stock:
o are not deposit accounts and are subject to investment risk;
o are not insured or guaranteed by the FDIC, or any other
government agency; and
o are not guaranteed by Westfield Financial or Westfield Bank.
Common Stock
Dividends. Westfield Financial can pay dividends from net profits if,
as and when declared by its Board of Directors. The payment of dividends by
Westfield Financial is subject
128
to limitations, which are imposed by law. See "Our Policy Regarding Dividends"
and "Regulation of Westfield Bank and Westfield Financial" The owners of
common stock of Westfield Financial will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors out of
funds legally available therefore. If Westfield Financial issues preferred
stock, the holders of the preferred stock may have a priority over the holders
of the common stock with respect to dividends.
Voting Rights. Upon the effective date of the reorganization, the
holders of common stock of Westfield Financial will possess exclusive voting
rights in Westfield Financial They will elect Westfield Financial's Board of
Directors and act on such other matters as are required to be presented to them
under law or Westfield Financial's Articles of Organization or as are otherwise
presented to them by the Board of Directors. Each holder of common stock will be
entitled to one vote per share and will not have any right to cumulate votes in
the election of directors. Under some circumstances, shares in excess of 10% of
Westfield Financial's common stock may be considered "Excess Shares" and may
therefore not be entitled to vote. See "Restrictions on Acquisition of Westfield
Financial and Westfield Bank." If Westfield Financial issues preferred stock,
holders of the preferred stock may also possess voting rights. Certain matters,
including the removal of directors, the approval of business combinations and
amending the Articles of Organization or Bylaws, generally requires an 80%
stockholder vote. See "Restrictions on Acquisition of Westfield Financial and
Westfield Bank."
Liquidation. In the event of any liquidation, dissolution or winding up
of Westfield Bank, Westfield Financial, as owner of Westfield Bank's capital
stock, would be entitled to receive, after payment or provision for payment of
all debts and liabilities of Westfield Bank (including all deposit accounts and
accrued interest thereon) and after distribution of the balance in the special
liquidation account to eligible account holders and the supplemental eligible
account holders (see "The Reorganization and The Stock Offering - Effects of the
Reorganization - Liquidation Rights"), all assets of Westfield Bank available
for distribution. In the event of liquidation, dissolution or winding up of
Westfield Financial, the holders of its common stock would be entitled to
receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of Westfield Financial available for
distribution. If preferred stock is issued, the holders thereof may have a
priority over the holders of the common stock in the event of the liquidation or
dissolution.
Preemptive Rights; Redemption. Holders of the common stock of Westfield
Financial will not be entitled to preemptive rights with respect to any shares
that may be issued. The common stock is not subject to redemption.
Preferred Stock
Westfield Financial will not issue any shares of its authorized
preferred stock in the reorganization and stock offering. We may issue with such
preferences and designations as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and reorganization rights
which could dilute the voting strength of the holders of the common stock and
may assist management in impeding an unfriendly takeover or attempted change in
control.
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Legal and Tax Opinions
Thacher Proffitt & Wood, Washington, D.C. will issue its opinion to us
of the legality of the issuance of the common stock being offered and certain
matters relating to the reorganization and stock issuance and federal taxation.
Certain matters relating to state taxation will be passed upon for us by
Deloitte & Touche, Hartford, Connecticut. Certain legal matters will be passed
upon for Keefe, Bruyette & Woods, Inc. by Muldoon Murphy & Faucette LLP.
Experts
The consolidated financial statements as of December 31, 2000 and 1999,
and for each of the three years in the period ended December 31, 2000, included
in this prospectus and the related financial statement schedules included
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement, and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
RP Financial has consented to the publication in this document of a
summary of its letter to Westfield Mutual Holding Company setting forth its
opinion as to the estimated pro forma market value of Westfield Bank after the
reorganization and stock issuance and its opinion setting forth the value of
subscription rights and to the use of its name and statements with respect to it
appearing in this document.
Registration Requirements
Our common stock is registered under Section 12(b) of the Securities
Exchange Act of 1934, as amended (the Exchange Act). We are subject to the
information, proxy solicitation, insider trading restrictions, tender offer
rules, periodic reporting and other requirements of the SEC under the Exchange
Act. We may not deregister the common stock under the Exchange Act for a period
of at least three years following the reorganization.
Where You Can Find Additional Information
We are subject to the informational requirements of the Exchange Act
and must file reports and other information with the SEC.
We have filed with the SEC a registration statement on Form S-1 under
the Securities Act of 1933, as amended, with respect to the common stock offered
in this document. As permitted by the rules and regulations of the SEC, this
document does not contain all the information set forth in the registration
statement. You may examine this information without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain copies of this material from the SEC at prescribed
rates. You may obtain information on the operations of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that
contains reports, proxy and information statements and other information
regarding registrants, including Westfield Financial, that file electronically
with the SEC. The address for this web site is "http://www.sec.gov."
130
This document contains a description of the material features of
certain exhibits to the Form S-1. The statements as to the contents of such
exhibits, however, are, of necessity, brief descriptions and are not necessarily
complete; each such statement is qualified by reference to such contract or
document.
A copy of Westfield Financial's Articles of Organization and Bylaws,
are available for review at any of our offices. A copy of the plan of
reorganization and minority stock issuance is available from offices of
Westfield Bank without charge. You may also call the Stock Information Center at
___________,(413) 562-6153, Monday through Friday, 9 a.m. to 4 p.m., to request a copy of
the plan. A copy of the appraisal report of RP Financial, including any
amendments made to it, and the detailed memorandum of the appraiser setting
forth the method and assumptions for such appraisal are available for inspection
at the main office of Westfield Bank.
Westfield Mutual Holding Company has filed an application for the
establishment of a stock holding company and associated stock issuance with the
Division of Banks of the Commonwealth of Massachusetts. Westfield Financial has
filed an application with the Federal Reserve Bank of Boston to become a bank
holding company. This prospectus omits some information contained in those
applications.
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You should rely only on the information contained in this document or
that to which we have referred you. We have not authorized anyone to provide you
with information that is different. This document does not constitute an offer
to sell, or the solicitation of an offer to buy, any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation
would be unlawful. The affairs of Westfield Bank or Westfield Financial may
change after the date of this prospectus. Delivery of this document and the
sales of shares made hereunder does not mean otherwise.
Westfield Financial, Inc.
(Proposed Stock Holding Company for Westfield Bank)
Up to 4,972,600 Shares of Common Stock
Prospectus
Keefe, Bruyette & Woods, Inc.
_____________, 2001
Until the later of _________, 2002 or 25 days after commencement of the
stock offering, all dealers effecting transactions in these securities, whether
or not participating in this stock offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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INDEX TO FINANCIAL STATEMENTS
WESTFIELD MUTUAL HOLDING COMPANY AND SUBSIDIARIES
Page
----
Independent Auditors' Report ............................................................ F-1
Consolidated Balance Sheets June 30, 2001 (Unaudited) December 31, 2000
and 1999 ...................................................................... F-2
Consolidated Statements of Income for the Six Months Ended June 30, 2001 and
2000 (Unaudited) and for each of the Years in the Three Year Period
Ended December 31, 2000 ........................................................ F-3
Consolidated Statements of Changes in Equity for the Six Months Ended June 30,
2001 (Unaudited) and for each of the Years in the Three Year Period
Ended December 31, 2000 ........................................................ F-4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and
2000 (Unaudited) and for each of the Years in the Three Year Period
Ended December 31, 2000 ........................................................ F-5
Notes to Consolidated Financial Statements .............................................. F-6
Board of Trustees
Westfield Mutual Holding Company
We have audited the accompanying consolidated balance sheets of Westfield Mutual
Holding Company and subsidiaries (the "Company") as of December 31, 2000 and
1999 and the related statements of income, changes in equity, and cash flows for
each of the three years in the period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
January 29, 2001
F-1
WESTFIELD MUTUAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
2001 2000 1999
---- ---- ----
ASSETS (Unaudited)
CASH AND DUE FROM BANKS $ 15,369 $ 17,733 $ 19,727
FEDERAL FUNDS SOLD 5 10,020 2,601
INTEREST-BEARING DEPOSITS 5,159 4,976 3,165
-------- -------- --------
Cash and cash equivalents 20,533 32,729 25,493
-------- -------- --------
SECURITIES (Note 2):
Available for sale - at estimated fair value 69,414 75,709 53,164
Held to maturity - at amortized cost (estimated fair value
of $31,139 (unaudited), $39,739 and $43,897 at June 30, 2001,
December 31, 2000 and 1999, respectively) 30,656 39,461 44,239
MORTGAGE BACKED SECURITIES (Note 3):
Available for sale - at estimated fair value 98,969 52,580 23,568
Held to maturity - at amortized cost (estimated fair value
of $38,823 (unaudited), $6,864 and $4,425 at June 30, 2001,
December 31, 2000 and 1999, respectively) 38,571 6,806 4,507
-------- -------- --------
Total securities 237,610 174,556 125,478
-------- -------- --------
FEDERAL HOME LOAN BANK
OF BOSTON AND OTHER STOCK 3,634 3,446 3,356
LOANS - Net of allowance for loan losses of $3,570 (unaudited),
$3,434, and $3,118 at June 30, 2001, December 31, 2000
and 1999 (Notes 4, 5 and 16) 421,781 464,531 467,444
PREMISES AND EQUIPMENT (Note 6) 13,384 11,744 8,589
ACCRUED INTEREST AND DIVIDENDS 4,170 4,172 3,607
DEFERRED INCOME TAX ASSET - Net (Note 13) 1,071 1,326 1,452
OTHER ASSETS (Note 7) 3,250 2,287 3,144
-------- -------- --------
TOTAL ASSETS $705,433 $694,791 $638,563
======== ======== ========
LIABILITIES AND EQUITY
LIABILITIES:
DEPOSITS (Note 8):
Noninterest bearing $ 45,599 $ 38,500 $ 29,592
Interest bearing 566,563 563,396 521,432
-------- -------- --------
Total deposits 612,162 601,896 551,024
CUSTOMER REPURCHASE AGREEMENTS (Note 9) 4,986 7,686 3,274
FEDERAL HOME LOAN BANK OF BOSTON
ADVANCES -- -- 5,000
OTHER LIABILITIES 7,431 7,454 8,020
-------- -------- --------
Total liabilities 624,579 617,036 567,318
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 15)
EQUITY (Note 12):
Retained earnings 79,163 76,791 70,711
Accumulated other comprehensive income 1,691 964 534
-------- -------- --------
Total equity 80,854 77,755 71,245
-------- -------- --------
TOTAL LIABILITIES AND EQUITY $705,433 $694,791 $638,563
======== ======== ========
See notes to consolidated financial statements.
F-2
WESTFIELD MUTUAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
Six Months Years Ended
Ended June 30, December 31,
------------------- -------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
(Unaudited)
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $13,207 $13,065 $26,523 $25,891 $26,861
Securities and mortgage backed securities 5,611 4,072 9,216 6,909 6,930
Consumer loans 2,920 3,226 6,306 5,493 3,162
Commercial and industrial loans 1,732 1,549 3,255 2,520 2,320
Federal funds sold 288 331 663 361 648
Stocks 201 169 386 289 608
Interest-bearing deposits 318 132 369 387 255
------- ------- ------- ------- -------
Total interest and dividend income 24,277 22,544 46,718 41,850 40,784
------- ------- ------- ------- -------
INTEREST EXPENSE:
Deposits (Note 8) 13,273 11,212 24,087 21,060 21,288
Customer repurchase agreements 151 132 320 41 -
Other borrowings - 111 128 50 -
------- ------- ------- ------- -------
Total interest expense 13,424 11,455 24,535 21,151 21,288
------- ------- ------- ------- -------
Net interest and dividend income 10,853 11,089 22,183 20,699 19,496
PROVISION FOR LOAN LOSSES (Note 5) 600 750 1,089 843 293
------- ------- ------- ------- -------
Net interest and dividend income after
provision for loan losses 10,253 10,339 21,094 19,856 19,203
------- ------- ------- ------- -------
NONINTEREST INCOME:
Service charges and fees 669 644 1,320 1,040 934
Gain on sales of securities, net (Notes 2 and 3) 170 680 1,535 515 269
------- ------- ------- ------- -------
Total noninterest income 839 1,324 2,855 1,555 1,203
------- ------- ------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits 3,772 3,443 7,871 6,994 6,476
Occupancy 811 709 1,422 1,198 1,481
Computer operations 751 601 1,185 988 801
Stationery, supplies and postage 305 240 502 628 552
Other 1,859 1,617 3,704 3,178 2,922
------- ------- ------- ------- -------
Total noninterest expense 7,498 6,610 14,684 12,986 12,232
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES 3,594 5,053 9,265 8,425 8,174
INCOME TAXES (Note 13) 1,222 1,747 3,185 2,898 3,062
------- ------- ------- ------- -------
NET INCOME $ 2,372 $ 3,306 $ 6,080 $ 5,527 $ 5,112
======= ======= ======= ======= =======
See notes to consolidated financial statements.
F-3
WESTFIELD MUTUAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Dollars in Thousands)
Accumulated
Other
Retained Comprehensive
Earnings Income Total
BALANCE, JANUARY 1, 1998 $ 60,072 $ 396 $ 60,468
Comprehensive income:
Net income 5,112 -- 5,112
Unrealized net gains on securities and mortgage backed securities
arising during the year, net of taxes of $747 -- 1,175 1,175
Reclassification for gains included in net income, net of taxes of $53 -- (83) (83)
--------
Comprehensive income -- -- 6,204
-------- -------- --------
BALANCE, DECEMBER 31, 1998 65,184 1,488 66,672
-------- -------- --------
Comprehensive income:
Net income 5,527 -- 5,527
Unrealized net losses on securities and mortgage backed securities
arising during the year, net of tax benefit of $298 -- (570) (570)
Reclassification for gains included in net income, net of taxes of $201 (384) (384)
--------
Comprehensive income -- -- 4,573
-------- -------- --------
BALANCE, DECEMBER 31, 1999 70,711 534 71,245
-------- -------- --------
Comprehensive income:
Net income 6,080 -- 6,080
Unrealized net losses on securities and mortgage backed securities
arising during the year, net of tax benefit of $507 -- (968) (968)
Reclassification for losses included in net income, net of tax benefit of $734 -- 1,398 1,398
--------
Comprehensive income -- -- 6,510
-------- -------- --------
BALANCE, DECEMBER 31, 2000 76,791 964 77,755
-------- -------- --------
Comprehensive income (unaudited):
Net income 2,372 -- 2,372
Unrealized net gains on securities and mortgage backed securities
arising during the year, net of taxes of $450 -- 873 873
Reclassification for gains included in net income, net of taxes of $76 -- (146) (146)
--------
Comprehensive income (unaudited) -- -- 3,099
-------- -------- --------
BALANCE, JUNE 30, 2001 (Unaudited) $ 79,163 $ 1,691 $ 80,854
======== ======== ========
See notes to consolidated financial statements.
F-4
WESTFIELD MUTUAL HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Six Months Ended June 30, Years Ended December 31,
------------------------- ------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
(Unaudited)
OPERATING ACTIVITIES:
Net income $ 2,372 $ 3,306 $ 6,080 $ 5,527 $ 5,112
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600 750 1,089 843 293
Valuation adjustment of other real estate owned -- -- -- 21 87
Other than temporary write-down of securities -- -- -- 83 --
Depreciation of premises and equipment 449 360 731 604 925
Net amortization of premiums and discounts on
securities, mortgage backed securities and
mortgage loans 77 121 (26) 230 201
Loss (gain) on sale of other real estate owned (17) (24) 7 (8) (46)
Gain on sales of mortgage loans -- -- -- -- (129)
Gain on sales of securities- net (170) (680) (1,535) (515) (269)
Deferred income tax provision (benefit) (86) (116) (61) (349) 234
Changes in assets and liabilities:
Accrued interest and dividends 2 (410) (565) (188) (73)
Other assets (1,176) 759 912 (216) (1,040)
Other liabilities (5) (438) (566) 245 1,595
-------- -------- -------- -------- --------
Net cash provided by operating activities 2,046 3,628 6,066 6,277 6,890
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (6,099) (12,397) (15,288) (24,502) (38,000)
Proceeds from maturities and principal collections 15,019 10,028 20,052 20,899 37,688
Securities, available for sale:
Purchases (13,257) (22,026) (33,737) (21,415) (15,147)
Proceeds from sales 4,325 3,131 4,799 4,528 2,153
Proceeds from maturities and principal collections 15,162 4,500 7,584 15,589 20,763
Mortgage backed securities, held to maturity:
Purchases (37,740) (4,671) (4,671) -- (1,004)
Principal collections 5,948 679 2,384 2,192 2,940
Mortgage backed securities, available for sale:
Purchases (11,383) (8,037) (40,476) (13,035) (10,092)
Proceeds from sales 14,776 -- 6,668 2,446 --
Principal collections 10,893 1,637 5,828 6,262 6,403
Purchase of Federal Home Loan Bank of Boston
and other stock (188) (90) (90) (190) (708)
Loans:
Purchases -- -- -- (6,772) --
Originated, net of principal collected (17,258) (561) 1,546 (46,232) (40,989)
Proceeds from sales -- -- -- -- 10,237
Proceeds from sale of other real estate owned 89 (204) 173 344 1,412
Net purchases of premises and equipment (2,095) (924) (3,886) (2,607) (1,320)
-------- -------- -------- -------- --------
Net cash used in investing activities (21,808) (28,935) (49,114) (62,493) (25,664)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Increase in deposits 10,266 17,322 50,872 42,711 25,344
Increase (decrease) in customer repurchase agreements (2,700) 2,994 4,412 3,274 --
Federal Home Loan Bank of Boston advances, net -- (2,000) (5,000) 5,000 --
-------- -------- -------- -------- --------
Net cash provided by financing activities 7,566 18,316 50,284 50,985 25,344
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (12,196) (6,991) 7,236 (5,231) 6,570
CASH AND CASH EQUIVALENTS:
Beginning of year 32,729 25,493 25,493 30,724 24,154
-------- -------- -------- -------- --------
End of year $ 20,533 $ 18,502 $ 32,729 $ 25,493 $ 30,724
======== ======== ======== ======== ========
See notes to consolidated financial statements.
F-5
WESTFIELD MUTUAL HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000 AND
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(Information with Respect to the Six-Month Periods Ended
June 30, 2001 and 2000 is Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Westfield Mutual Holding Company (the "Company") is
a Massachusetts security corporation. The Company has a state chartered
stock savings bank subsidiary called Westfield Bank (the "Bank"). The
Bank's deposits are insured to the limits specified by the Federal Deposit
Insurance Corporation ("FDIC") and the Deposit Insurance Fund ("DIF"), a
corporation formed by the Massachusetts' legislature. The Bank operates
seven branches in Western Massachusetts. The Bank's primary source of
revenue is earned by providing loans to small and middle-market businesses
and to residential property homeowners.
The Bank has formed Westfield Elm Associates, Inc., ("Westfield Elm"), a
wholly owned subsidiary. In addition, Westfield Elm has formed two
subsidiaries, Elm Street Real Estate Investments Inc., (the "REIT") and Elm
Street Business Trust (the "MBT"). The REIT is 99.9% owned by Westfield Elm
with the remaining .1% owned by other shareholders. The MBT was 100% wholly
owned by Westfield Elm. During 2000, the Company eliminated Westfield Elm
and the MBT to streamline the overall bank structure.
Unaudited Financial Information - Information as of June 30, 2001 and for
the six month periods ended June 30, 2001 and 2000 is unaudited. The
unaudited information furnished reflects all adjustments, which consist
solely of normal recurring accruals, which are in the opinion of
management, necessary for a fair presentation of the financial position at
June 30, 2001 and the results of operations and cash flows for the
six-month periods ended June 30, 2001 and 2000. The results of the
six-month periods are not necessarily indicative of the results of the
Company which may be expected for the entire year.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company, the Bank, and the REIT. All material
intercompany balances and transactions have been eliminated in
consolidation. Certain amounts in the prior year financial statements have
been reclassified to conform to the current year presentation.
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses for each. Actual results could
differ from those estimates. Estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the fair
value of financial instruments and the allowance for loan losses.
Cash and Cash Equivalents - The Company defines cash on hand, cash due from
banks, federal funds sold and interest bearing deposits having an original
maturity of 90 days or less as cash and cash equivalents. Cash and due from
banks at June 30, 2001, December 31, 2000 and 1999 is partially restricted
by approximately $2,426,000, $2,176,000, and $2,190,000 respectively, for
Federal Reserve Bank of Boston cash reserve requirements.
F-6
Securities and Mortgage Backed Securities - Securities, including mortgage
backed securities, which management has the positive intent and ability to
hold until maturity are classified as held to maturity and are carried at
amortized cost. Securities, including mortgage backed securities, which
have been identified as assets for which there is not a positive intent to
hold to maturity are classified as available for sale and are carried at
fair value with unrealized gains and losses, net of income taxes, reported
as a separate component of equity. The Company does not acquire securities
and mortgage backed securities for purposes of engaging in trading
activities.
Realized gains and losses on sales of securities and mortgage backed
securities are computed using the specific identification method and are
included in noninterest income. Securities and mortgage backed securities
which have experienced an other than temporary decline in value are written
down to estimated fair value, establishing a new cost basis with the amount
of the write-down included in expense as a realized loss. The amortization
of premiums and accretion of discounts is determined by using the level
yield method to the earlier of the call or maturity date.
Loans - Loans are recorded at the principal amount outstanding. Interest on
loans is calculated using the effective yield method on daily balances of the
principal amount outstanding and is credited to income on the accrual basis to
the extent it is deemed collectible. The Company's general policy is to
discontinue the accrual of interest when principal or interest payments are
delinquent 90 days or more, or earlier if the loan is considered impaired. Any
unpaid amounts previously accrued on these loans are reversed from income.
Subsequent cash receipts are applied to the outstanding principal balance or to
interest income if, in the judgment of management, collection of the principal
balance is not in question. Loans are returned to accrual status when they
become current as to both principal and interest and when subsequent performance
reduces the concern as to the collectibility of principal and interest. Loan
fees and certain direct loan origination costs are deferred and the net fee or
cost is recognized as an adjustment to interest income over the estimated
average lives of the related loans. Compensation paid to an auto dealer is
normally based upon a spread that a dealer adds on the loan base rate set by the
Company, the compensation paid to an automobile dealer shortly after the loan is
originated. The Company records the compensation as a receivable that is
amortized over the life of the loans in relation to the interest paid by the
customer.
Allowance for Loan Losses - The allowance for loan losses is established
through provisions for loan losses charged to expense. Loans are charged
off against the allowance when management believes that the collectibility
of the principal is unlikely. Recoveries of amounts previously charged-off
are credited to the allowance.
The Bank maintains an allowance for loan losses to absorb losses inherent
in the loan portfolio based on ongoing quarterly assessments of the
estimated losses. The Bank's methodology for assessing the appropriateness
of the allowance consists of two key components, which are a specific
allowance for identified problem loans and a formula allowance for the
remainder of the portfolio. The specific allowance incorporates the results
of measuring impaired loans as provided in SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
These accounting standards prescribe the measurement methods, income
recognition and disclosures related to impaired loans. The formula
allowance is calculated by applying loss factors to outstanding loans by
type, excluding loans for which a specific allowance has been determined.
Loss factors are based on historical loss experience.
A loan is recognized as impaired when it is probable that principal and/or
interest are not collectible in accordance with the loan's contractual
terms. A loan is not deemed to be impaired if there is a short delay in
receipt of payment or if, during a longer period of delay, the Company
expects to collect all amounts due including interest accrued at the
contractual rate during the period of delay. Measurement of impairment can
be based on present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's observable market price or the
fair value of the collateral, if the loan is collateral dependent. This
evaluation is inherently subjective as it requires material estimates that
may be susceptible to significant change. If the fair value of the impaired
loan
F-7
is less than the related recorded amount, a specific valuation allowance is
established within the allowance for loan or a writedown is charged against
the allowance for loan losses if the impairment is considered to be
permanent. Measurement of impairment does not apply to large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment such as the Company's portfolios of home equity loans, real
estate mortgages, installment and other loans.
The appropriateness of the allowance is also reviewed by management based
upon its evaluation of then existing economic and business conditions
affecting the key lending areas of The Company and other conditions, such
as new loan products, credit quality, trends (including trends in
nonperforming loans expected to result from existing conditions),
collateral values, loan volumes and concentrations, specific industry
conditions within portfolio segments that existed as of the balance sheet
date and the impact that such conditions were believed to have had on the
collectibility of loan portfolio. There may be other factors that may
warrant the Company's consideration in maintaining the allowance at a level
sufficient to cover probable losses. Although management believes it has
established and maintained the allowance for loan losses at adequate
levels, future adjustments may be necessary if economic, real estate and
other conditions differ substantially from the current operating
environment.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review our loan and foreclosed real
estate portfolios and the related allowance for loan losses and valuation
allowance for foreclosed real estate. These agencies, including the FDIC
and the Massachusetts Division of Banks, may require adjustment to the
allowance for loan losses based on their judgments of information available
to them at the time of their examination, thereby adversely affecting
results of operations.
Management believes that the allowance for loan losses accurately reflects
estimated credit losses for specifically identified loans, as well as
probable credit losses inherent in the remainder of the portfolio as of the
end of the periods presented.
Transfers and Servicing of Financial Assets - The Company follows the
provisions of SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No. 140 provides
consistent application of a financial-components approach that recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered
and derecognizes liabilities when extinguished.
Premises and Equipment - Land is carried at cost. Buildings and equipment
are stated at cost, less accumulated depreciation, computed on either the
straight-line or accelerated methods over the estimated useful lives of the
assets, generally 3 to 40 years.or lease term, if shorter, as follows:
Years
-----
Buildings 39
Leasehold Improvements 20
Furniture and Equipment 3-7
It is general practice to charge the cost of maintenance and repairs to
expense when incurred; major expenditures for betterments are capitalized
and depreciated.
Other Real Estate Owned - Other real estate owned represents property
acquired through foreclosure or deeded to the Company in lieu of
foreclosure. Other real estate owned is recorded at the lower of the
carrying value of the related loan, or the estimated fair value of the real
estate acquired, net of estimated selling costs. Initial write-downs are
charged to the allowance for loan losses at the time the loan is
transferred to other real estate owned. Subsequent valuations are
periodically performed by management and the carrying value is adjusted by
a charge to expense to reflect any subsequent declines in the estimated
fair value. Operating costs associated with other real estate owned are
expensed as incurred.
Retirement Plans and Employee Benefits - The Company provides a defined
benefit pension plan for eligible employees through membership in the
Savings Banks Employees Retirement Association ("SBERA"). The Company's
policy is to fund pension cost as accrued. Employees are also eligible to
participate in a 401(k) plan through SBERA. Beginning in 2000, the Company
began making matching contributions to this plan at 50% of up to 6% of the
employees' eligible compensation.
F-8
The Company currently offers postretirement life insurance benefits to
retired employees. Such postretirement benefits represent a form of
deferred compensation which requires that the cost and obligations of such
benefits are recognized in the period in which services are rendered.
Income Taxes - The Company uses the asset and liability method for income
tax accounting, whereby, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates applied to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Unaudited Financial Information - Information as of June 30, 2001 and for
the six-month periods ended June 30, 2001 and 2000 is unaudited. The
unaudited information furnished reflects all adjustments, which consist
solely of normal recurring accruals, which are in the opinion of
management, necessary for a fair presentation of the financial position at
June 30, 2001 and the results of operations and cash flows for the
six-month periods ended June 30, 2001 and 2000. The results of the
six-month periods are not necessarily indicative of the results of the
Company which may be expected for the entire year.
New Accounting Standards - In July 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS")
No. 141, "Business Combinations." SFAS No. 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets", which is effective January 1, 2002. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization, the
reclassification of certain existing recognized intangibles as goodwill,
the reassessment of the useful lives of existing recognized intangibles and
the identification of reporting units for purposes of assessing potential
future impairments of goodwill. SFAS 142 also requires a transitional
goodwill impairment test six months from the date of adoption.
Management does not believe the adoption of these standards will have a
material effect on its consolidated financial statements.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities- Deferral of Effective
Date of FASB Statement No. 133, which establishes accounting and reporting
standards for derivatives, derivative instruments embedded in other
contracts and for hedging activities. In 2000, the FASB issued SFAS No.
138, Accounting for Certain Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for certain
derivatives, derivative instruments embedded in other contracts and for
certain hedging activities. These statements became effective for the
Company on January 1, 2001. The adoption of these statements had no effect
on the Company's consolidated financial statements.
F-9
2. SECURITIES
Securities at June 30, 2001 are summarized as follows:
June 30, 2001 (unaudited)
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------
(In Thousands)
Held to maturity:
Federal agency obligations $ 14,006 $ 138 $ 1 $ 14,143
Corporate debt securities 16,511 358 12 16,857
Other securities 139 - - 139
-------- -------- -------- --------
Total held to maturity 30,656 496 13 31,139
-------- -------- -------- --------
Available for sale:
Corporate debt securities 31,278 544 7 31,815
Equity securities 12,178 1,512 843 12,847
Federal agency obligations 21,653 225 18 21,860
Other securities 2,878 14 -- 2,892
-------- -------- -------- --------
Total available for sale 67,987 2,295 868 69,414
-------- -------- -------- --------
Total Securities $ 98,643 $ 2,791 $ 881 $100,553
======== ======== ======== ========
Securities at December 31, 2000 are summarized as follows:
December 31, 2000
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------
(In Thousands)
Held to maturity:
Federal agency obligations $ 23,890 $ 162 $ 20 $ 24,032
Corporate debt securities 15,409 148 9 15,548
Other securities 162 - 3 159
-------- -------- -------- --------
Total held to maturity 39,461 310 32 39,739
-------- -------- -------- --------
Available for sale:
Corporate debt securities 40,693 232 614 40,311
Equity securities 8,063 2,095 414 9,744
Federal agency obligations 19,298 320 72 19,546
Other securities 6,088 22 2 6,108
-------- -------- -------- --------
Total available for sale 74,142 2,669 1,102 75,709
-------- -------- -------- --------
Total Securities $113,603 $ 2,979 $ 1,134 $115,448
======== ======== ======== ========
F-10
Securities at December 31, 1999 are summarized as follows:
December 31, 1999
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
(In Thousands)
Held to maturity:
Federal agency obligations $26,917 $ - $ 267 $ 26,650
Corporate debt securities 14,111 - 76 14,035
U.S. Government obligations 2,997 8 - 3,005
Other securities 214 - 7 207
------- ------- ------- --------
Total held to maturity 44,239 8 350 43,897
------- ------- ------- --------
Available for sale:
Corporate debt securities 34,397 3 660 33,740
U.S. Government obligations 2,000 2 - 2,002
Equity securities 6,303 3,078 187 9,194
Federal agency obligations 8,509 - 281 8,228
------- ------- ------- --------
Total available for sale 51,209 3,083 1,128 53,164
------- ------- ------- --------
Total Securities $95,448 $ 3,091 $ 1,478 $97,061
======= ======= ======= =======
F-11
The amortized cost and fair value of debt securities at June 30, 2001 and
December 31, 2000, by maturity, are shown below. Actual maturities may
differ from contractual maturities because certain issues have the right to
call or repay obligations.
June 30, 2001 (unaudited) December 31, 2000
----------------------------- -----------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------------------------- -----------------------------
(In Thousands)
Held to maturity:
Due in one year or less $13,041 $13,176 $ 8,011 $ 8,004
Due after one year through five years 17,476 17,824 31,288 31,576
Due after five years through ten years 139 139 162 159
------- ------- ------- -------
Total held to maturity $30,656 $31,139 $39,461 $39,739
======= ======= ======= =======
Available for sale:
Due in one year or less $ 8,490 $ 8,631 $ 9,014 $ 9,015
Due after one year through five years 36,829 37,411 51,253 51,130
Due after five years through ten years 2,546 2,563 2,832 2,833
Due after ten years 7,944 7,962 2,980 2,987
------- ------- ------- -------
Total available for sale $55,809 $56,567 $66,079 $65,965
======= ======= ======= =======
Gross gains of $364,049, $689,085, $1,878,716, $1,065,279 and $667,557 and
gross losses of $212,875, $9,234, $328,395, $457,110, and $398,924 were
recorded on securities during the six months ended June 30, 2001 and 2000
and years ended December 31, 2000, 1999, and 1998, respectively. During
1999, the Company realized a loss of $83,000 for an other than temporary
impairment in value.
Securities with a par value of $12,000,000, $13,000,000 and $11,000,000
were pledged as collateral to the Federal Reserve Bank of Boston at June
30, 2001 and December 31, 2000 and 1999, respectively.
F-12
3. MORTGAGE BACKED SECURITIES
Mortgage backed securities at June 30, 2001 are summarized as follows:
June 30, 2001
(unaudited)
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
(In Thousands)
Held to maturity:
Fannie Mae $ 8,220 $ 141 $ 16 $ 8,345
Freddie Mac 13,124 145 - 13,269
Ginnie Mae 6,705 22 27 6,700
Collateralized Mortgage Obligations 10,522 40 53 10,509
-------- -------- -------- --------
Total held to maturity 38,571 348 96 38,823
-------- -------- -------- --------
Available for sale:
Fannie Mae 75,689 658 67074,924 1,007 254 75,677
Freddie Mac 4,587 148 - 4,735
Ginnie Mae 9,447 126 10 9,563
Collateralized Mortgage Obligations 8,838 156 - 8,994
-------- -------- -------- --------
Total available for sale 98,561 1,088 68097,796 1,437 264 98,969
-------- -------- -------- --------
Total Mortgage Backed Securities $137,132$136,367 $ 1,4361,785 $ 776360 $137,792
======== ======== ======== ========
Mortgage backed securities at December 31, 2000 are summarized as follows:
December 31, 2000
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------
(In Thousands)
Held to maturity:
Fannie Mae $ 4,555 $ 123 $ 27 $ 4,651
Freddie Mac 957 1 8 950
Ginnie Mae 1,294 2 33 1,263
------- ------- ------- -------
Total held to maturity 6,806 126 68 6,864
------- ------- ------- -------
Available for sale:
Fannie Mae 29,174 80 321 28,933
Freddie Mac 4,728 45 3 4,770
Ginnie Mae 8,610 65 31 8,644
Collateralized Mortgage Obligations 10,016 217 - 10,233
------- ------- ------- -------
Total available for sale 52,528 407 355 52,580
------- ------- ------- -------
Total Mortgage Backed Securities $59,334 $ 533 $ 423 $59,444
======= ======= ======= =======
F-13
Mortgage backed securities at December 31, 1999 are summarized as follows:
December 31, 1999
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------
(In Thousands)
Held to maturity:
Fannie Mae $ 2,079 $ - $ 53 $ 2,026
Freddie Mae 1,551 8 - 1,559
Ginnie Mae 877 2 39 840
------- ------- ------- -------
Total held to maturity 4,507 10 92 4,425
------- ------- ------- -------
Available for sale:
Fannie Mae 20,790 11 912 19,889
Freddie Mae 2,099 12 12 2,099
Ginnie Mae 1,634 3 57 1,580
------- ------- ------- -------
Total available for sale 24,523 26 981 23,568
------- ------- ------- -------
Total Mortgage Backed Securities $29,030 $ 36 $ 1,073 $27,993
======= ======= ======= =======
Collateralized Mortgage Obligations ("CMOs") - CMOs include traunches of
AAA investment grade and consist of high quality mortgage obligations.
Gross gains of $159,541, $0, $15,781, $11,485 and $0 and gross losses of
$140,894, $0, $31,365, $21,352 and $0 were recorded on mortgage backed
securities during the six months ended June 30, 2001 and 2000 and the years
ended December 31, 2000, 1999 and 1998, respectively.
4. LOANS
Loans consisted of the following amounts as of:
June 30, 2001 December 31,
(unaudited)2001 2000 1999
--------------- ---- ----
(In Thousands)
Residential real estate $ 215,697 $ 264,162 $ 264,883
Commercial and industrial 48,696 37,510 32,673
Commercial real estate 93,726 92,826 89,333
Consumer 67,020 73,339 83,442
--------- --------- ---------
425,139 467,837 470,331
Unearned premiums and deferred loan fees
and costs, net 212 128 231
Allowance for loan losses (3,570) (3,434) (3,118)
--------- --------- ---------
$ 421,781 $ 464,531 $ 467,444
========= ========= =========
F-14
The following table summarizes information regarding impaired loans:
Six Months Ended Years Ended
June 30, 2001 December 31,
---------------- ---------------------
(unaudited)2001 2000 1999
--------------- ---- ----
(Dollars In Thousands)
Recorded investment in impaired loans, period end $1,099 $1,440 $1,956
Average recorded investment in impaired loans 1,270 1,394 1,408
Allowance for impaired loans 85 77 136
Income recorded during the period for impaired loans 43 97 168
Income recorded on cash basis during the period for impaired loans 43 92 136
Restructured loans totaled $335,383 at December 31, 2000 and 1999. All
such loans were included in impaired loans. No restructured loans existed
at June 30, 2001.
Nonaccrual loans at June 30, 2001, December 31, 2000 and 1999 and related
interest income are summarized as follows:
Six Months Ended Years Ended
June 30, 2001 December 31,
----------------------------------------------
(unaudited)2001 2000 1999
--------------- ---- ----
(In Thousands)
Amount $2,328 $2,308 $2,751
Interest income that would
have been recorded under
the original contract terms 238 191 131
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid balances of these loans totaled
$106,435,205, $50,683,129 and $54,602,377 at June 30, 2001, December 31,
2000 and 1999, respectively. Service fee income of $44,983, $81,106,
$119,927, $134,762, and $125,860 was recorded for the six months ended June
30, 2001 and 2000, and for the years ended December 31, 2000, 1999, and
1998, respectively.
Loan Securitization - On June 1, 2001, the Company securitized residential
real estate mortgagesmortgage with a recorded value of approximately $60 million.
In this securitization, theThe Company retained servicing responsibilities and all beneficial
interests in the resulting mortgage backed securities. As a
resultThe Company has not
committed to sell any of retainingthe retained mortgage backed securities before or
during the securitization process. The resulting mortgage backed securities
in the amount of $59.5 million are included in Mortgage Backed
Securities-Available for Sale as of June 30, 2001 in accordance with the
provisions of SFAS 115.
The Company's servicing assets are recorded at fair value at the time the
asset is acquired. The fair value is based upon the net present value of
future cash flows of the net servicing revenue. Assumptions used in
determining fair value include service fee revenue, escrow revenue,
servicing expense, and estmated life of the underlying loans the servicing
rights,asset is amortized in proportion to the Company recorded an asset
equalestimated net servicing revenue of
the loans. The carrying value of the servicing assets as of June 30, 2001
was $683,054.
The fair value of the assets is recalculated quarterly to thedetermine
possible impairment. The fair value of the servicing rights which approximated $576,000
at the dateassets as of the transaction and at June 30,
2001.2001 was $696,765.
F-15
5. ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses is as follows:
Six Month Ended
June 30, Years Ended December 31,
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
(In Thousands and Unaudited)Thousands) (In Thousands)
Balance, beginning of year $ 3,434 $ 3,118 $ 3,118 $ 2,632 $ 2,791
Provision 600 750 1,089 843 293
Loans charged off (717) (507) (1,059) (545) (750)
Recoveries 253 61 286 188 298
------- ------- ------- ------- -------
Balance, end of year $ 3,570 $ 3,422 $ 3,434 $ 3,118 $ 2,632
======= ======= ======= ======= =======
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
June 30, 2001 December 31,
(unaudited)2001 2000 1999
--------------- ---- ----
(In Thousands)
Land $ 2,288 $ 1,835 $ 1,835
Buildings 11,054 10,399 6,863
Leasehold improvements 742 742 742
Furniture and equipment 5,413 4,431 4,081
-------- -------- --------
Total 19,497 17,407 13,521
Accumulated depreciation and amortization (6,113) (5,663) (4,932)
-------- -------- --------
Premises and equipment, net $ 13,384 $ 11,744 $ 8,589
======== ======== ========
7. OTHER REAL ESTATE OWNED
Other real estate owned of $112,046 and $55,132 was included in Other
Assets at June 30, 2001 and December 31, 2000. No other real estate owned
existed at December 31, 1999. During the six months ended June 30, 2001 and
2000, and the years ended December 31, 2000, 1999, and 1998, the Company
transferred loans, at fair value less costs to dispose, to other real
estate owned of $140,546, $180,037, and $235,170, $0 and $1,078,183. No
loans to facilitate the sale of other real estate owned were made during
the six months ended June 30, 2001 and 2000, or the years ended December
31, 2000 and 1999. Loans to facilitate the sale of other real estate owned
were made totaling $118,045 during the year ended December 31, 1998.
F-16
8. DEPOSITS
Deposit accounts by type and weighted average rates are summarized as
follows:
June 30, 2001 Rate December 31, Rate December 31, Rate
(unaudited)2001 2000 1999
--------------- ---- ----
(Dollars In Thousands)
Demand and Now:
Now accounts $ 37,097 2.41% $ 34,519 2.37% $ 34,029 2.21%
Demand accounts 45,599 - 38,500 - 29,591 -
Savings:
Regular accounts 42,797 1.05 42,348 1.07 50,285 1.06
Money market accounts 121,957 3.17 113,787 3.74 113,561 3.34
Time certificates of deposit 364,712 5.33 372,742 5.79 323,558 5.13
-------- -------- ---------
Total deposits $612,162 $601,896 $ 551,024
======== ======== =========
Time deposits of $100,000 or more totaled approximately $71,652,000,
$70,832,000 and $49,369,000 at June 30, 2001, December 31, 2000 and 1999,
respectively. Interest expense on such deposits totaled $2,140,199,
$3,481,955, $2,248,906 and $1,892,488 for the six months ended June 30,
2001 and for the years ended December 31, 2000, 1999 and 1998 respectively.
Cash paid for interest was:
June 30, 2001 December 31,
-----------------------------------------------
(unaudited)------------------------------------------
2001 2000 1999 1998
--------------- ---- ---- ----
(In Thousands)
Deposits $13,247 $24,122 $21,053 $21,278
Customer Repurchase Agreements 151 320 41 -
Federal Home Loan Advances - 128 50 -
------- ------- ------- -------
Total $13,398 $24,570 $21,144 $21,278
======= ======= ======= =======
At June 30, 2001, the scheduled maturities of time certificates of deposits
are as follows:
Amount Rate
(unaudited)
(Dollars in Thousands)
Within 1 year $ 264,142 5.26%
Over 1 year to 3 years 98,234 5.52
Over 3 years to 5 years 2,336 5.17
-----------
Total certificates of deposits $ 364,712 5.33%
===========
F-17
At December 31, 2000, the scheduled maturities of time certificates of
deposits are as follows:
Amount Rate
(Dollars in Thousands)
Within 1 year $281,491 5.76%
Over 1 year to 3 years 90,710 5.94
Over 3 years to 5 years 541 5.58
--------
Total certificates of deposits $372,742 5.79%
========
9. CUSTOMER REPURCHASE AGREEMENTS
The following table summarizes information regarding repurchase agreements:
Six Months Ended Years Ended
June 30, 2001 December 31,
------------- ----------------------
(unaudited)---------------- -----------------
2001 2000 1999
--------------- ---- ----
(Dollars In Thousands)
Balance outstanding, end of year $ 4,986 $ 7,686 $ 3,274
Average amount outstanding at any month end during period 6,482 8,222 3,4248,440 3,634
Average amount outstanding during period 6,982 6,001 1,025
Weighted average interest rate 6.00%4.32% 5.34% 4.00%
Book value of collateral pledged
end of period 11,006 12,017 10,038
Fair value of collateral pledged
end of period 11,103 12,006 9,925
There were no customer repurchase agreements outstanding for the year ended
December 31, 1998.
F-18
10. LINE OF CREDIT
The Company has a line of credit with the Federal Reserve Bank of Boston,
enabling it to borrow up to 4% of deposits, to be collateralized by
marketable securities. Additionally, the Company has an "Ideal Way" line
of credit with the Federal Home Loan Bank for $9,541,000 at June 30, 2001
and December 31, 2000. No amounts were outstanding under these lines at
June 30, 2001 and December 31, 2000. At December 31, 1999, the Company had
$5,000,000 outstanding under the "Ideal Way" line of credit that were
repaid in 2000.
11. RETIREMENT PLANS AND EMPLOYEE BENEFITS
Pension Plan - The Company provides basic and supplemental pension
benefits for eligible employees through the Savings Banks Employees
Retirement Association Pension Plan (the "Plan"). Employees must work a
minimum of 1,000 hours per year to be eligible for the Plan. Eligible
employees become vested in the Plan after five years of service.
The following table provides information for the Plan at December 31:
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Change in benefit obligation:
Benefit obligation, beginning of year $ 4,673 $ 4,402 $ 3,807
Service cost 364 342 301
Interest 362 297 276
Actuarial (gain) loss (399) (282) 140
Benefits paid (80) (86) (122)
------- ------- -------
Benefit obligation, end of year $ 4,920 $ 4,673 $ 4,402
======= ======= =======
Change in plan assets:
Fair value of plan assets, beginning of year $ 4,563 $ 3,573 $ 3,256
Actual return on plan assets 666 710 266
Employer contribution 371 366 173
Benefits paid (80) (86) (122)
------- ------- -------
Fair value of plan assets, end of year $ 5,520 $ 4,563 $ 3,573
======= ======= =======
Funded status (fair value of plan assets
less benefit obligation) $ (600) $ 110 $ 829
Unrecognized net actuarial gain 2,137 1,497 823
Transition liability 162 173 185
------- ------- -------
Accrued benefit cost $ 1,699 $ 1,780 $ 1,837
======= ======= =======
F-19
Net pension cost includes the following components for the years ended
December 31:
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Service cost $ 364 $ 342 $ 301
Interest cost 362 297 276
Expected return on assets (365) (286) (260)
Actuarial loss (59) (31) (38)
Transition obligation (12) (12) (12)
----- ----- -----
Net periodic pension cost $ 290 $ 310 $ 267
===== ===== =====
The following actuarial assumptions were used for the years ended December
31:
2000 1999 1998
---- ---- ----
Weighted-average assumptions:
Discount rate 7.75% 7.75% 7.25%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.50% 5.50% 6.00%
Postretirement Benefits - The Company provides postretirement life
insurance benefits to employees based on the employee's salary at time of
retirement. The accrual of postretirement benefits other than pension
expense is made during the years an employee provides service. The
following sets forth the funded status:
June 30, 2001 December 31,
(unaudited)2001 2000 1999
----------- ---- ----
(Dollars in Thousands)
Benefits obligation $ 444 $ 440 $ 401
Fair value of plan assets -- -- --
----- ----- -----
Funded status $(444) $(440) $(401)
===== ===== =====
Accrued benefit costs $(327) $(270) $(214)
===== ===== =====
Weighted-average assumptions:
Discount rate 7.0% 7.0% 7.0%
Expected return on plan assets 8.0% 8.0% 8.0%
Rate of compensation increase 6.0% 6.0% 6.0%
Benefit cost $ 50 $ 49 $ 44
Benefit paid 11 38 38
Supplemental Retirement Benefits - The Company provides supplemental
retirement benefits to certain key officers. At June 30, 2001, and December
31, 2000 and 1999, the Company had accrued $1,672,213, $1,596,731 and
$1,435,767, respectively, relating to these benefits. Amounts charged
F-20
to expense were $90,000, $190,000, $155,000 and $136,000 for the six months
ended June 30, 2001 and the years ended December 31, 2000, 1999 and 1998,
respectively.
401(k) - Employees are eligible to participate in a 401(k) plan through
SBERA. During 2000, the Company began making a matching contribution of 50%
with respect to the first 6% of each participant's annual earnings
contributed to the plan. The Company's contribution to the plan was
$102,933, for the year ended December 31, 2000. There were no matching
contributions during the six months ended June 30, 2001.
12. REGULATORY CAPITAL
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's
and the Bank's financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined) and of Tier 1
capital (as defined) to average assets (as defined). Management believes,
as of June 30, 2001 and December 31, 2000 and 1999, that the Company and
the Bank met all capital adequacy requirements to which they are subject.
As of June 30, 2001 and December 31, 2000 the most recent notification from
The Federal Deposit Insurance Corporation categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well capitalized" the Bank must maintain minimum
total risk-based, Tier I risk based and Tier I leverage ratios as set forth
in the following. There are no conditions or events since that notification
that management believes have changed the Bank's category. The Company's
and the Bank's actual capital ratios as of June 30, 2001, December 31, 2000
and 1999 are also presented in the table.
F-21
Minimum
To Be Well
Minimum Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(unaudited)
(Dollars in Thousands)
June 30, 2001
Total Capital (to Risk Weighted Assets):
Consolidated $83,139 18.23% $36,484 8.00% N/A -
Bank 49,303 11.43 34,508 8.00 $43,135 10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated 79,258 17.38 18,241 4.00 N/A -
Bank 45,310 10.50 17,261 4.00 25,891 6.00
Tier I Capital (to Average Assets):
Consolidated 79,258 11.21 28,281 4.00 N/A -
Bank 45,310 6.73 26,930 4.00 33,663 5.00
Minimum
To Be Well
Minimum Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
December 31, 2000
Total Capital (to Risk Weighted Assets):
Consolidated $81,066 17.24% $37,618 8.00% N/A -
Bank 47,873 10.78 35,527 8.00 $44,409 10.00%
Tier I Capital (to Risk Weighted
Assets):
Consolidated 76,768 16.33 18,804 4.00 N/A -
Bank 43,575 9.81 17,768 4.00 26,651 6.00
Tier I Capital (to Average Assets):
Consolidated 76,768 11.51 26,679 4.00 N/A -
Bank 43,575 6.72 25,937 4.00 32,422 5.00
F-22
Minimum
To Be Well
Minimum Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
December 31, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated $75,224 17.32% $34,745 8.0% N/A -
Bank 43,269 10.56 32,780 8.0 $40,974 10.0%
Tier I Capital (to Risk Weighted Assets):
Consolidated 70,692 16.28 17,369 4.0 N/A -
Bank 38,737 9.45 16,397 4.0 24,595 6.0
Tier I Capital (to Average Assets):
Consolidated 70,692 11.11 25,452 4.0 N/A -
Bank 38,737 6.41 24,173 4.0 30,216 5.0
13. INCOME TAXES
Income taxes (benefit) consist of the following:
Six Months Years Ended
Ended June 30, December 31,
--------------------- -------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
(unaudited)
-----------
(In Thousands)
Federal:
Current $ 1,308 $ 1,863 $ 3,246 $ 3,247 $ 2,822
Deferred (86) (116) (61) (349) (259)
------- ------- ------- ------- -------
Total 1,222 1,747 3,185 2,898 2,563
------- ------- ------- ------- -------
State:
Current - - - - 6
Deferred - - - - 493
------- ------- ------- ------- -------
Total - - - - 499
------- ------- ------- ------- -------
Total:
Current 1,308 1,863 3,246 3,247 2,828
Deferred (86) (116) (61) (349) 234
------- ------- ------- ------- -------
Total $ 1,222 $ 1,747 $ 3,185 $ 2,898 $ 3,062
======= ======= ======= ======= =======
Cash paid for income taxes for the six months ended June 30, 2001 and June
30, 2000 and for the years ended December 31, 2000, 1999 and 1998 was $0,
$1,630,000, $3,333,000, $3,041,000 and $3,146,000, respectively.
F-23
The reconciliation between the provision for income taxes and the provision
for income taxes at the federal statutory rate is as follows:
June 30, December 31,
-------------------- ------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
(unaudited)
(In Thousands, except percentages)
Income before income taxes $ 3,594 $ 5,053 $ 9,265 $ 8,425 $ 8,174
Federal statutory rate 34% 34% 34% 34% 34%
Provision for income taxes at
Federal statutory rate $ 1,222 $ 1,718 $ 3,150 $ 2,865 $ 2,779
State income taxes - - - - 231
Officers life insurance 1 (4) (7) (7) (9)
Tax exempt interest (5) (4) (10) (2) 3
Dividends received deduction (9) (9) (18)
Other 13 46 70 42 58
------- ------- ------- ------- -------
Total $ 1,222 $ 1,747 $ 3,185 $ 2,898 $ 3,062
======= ======= ======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
June 30, 2001 December 31,
(unaudited)2001 2000 1999
----------- ---- ----
(In Thousands)
Deferred tax assets:
Accrued pension $ 1,199 $ 1,137 $ 1,087
Allowance for loan losses 1,172 1,126 965
Nonaccrual interest 201 203 220
Depreciation expense - - 40
Other 84 81 120
------- ------- -------
Deferred tax assets 2,656 2,547 2,432
------- ------- -------
Deferred tax liabilities:
Depreciation expense (89) (116) -
Loan origination fees (320) (234) (223)
Unrealized gain on available for sale securities (910) (654) (466)
Other (266) (217) (291)
------- ------- -------
Deferred tax liabilities (1,585) (1,221) (980)
------- ------- -------
Net deferred tax asset $ 1,071 $ 1,326 $ 1,452
======= ======= =======
Retained earnings includes accumulated bad debt deductions for tax purposes
of approximately $5,832,000 on which no federal income tax has been paid.
If this amount, or any portion thereof, is used for purposes other than to
absorb the losses for which it was established, the amount so used must be
included in gross income for federal income tax purposes for the fiscal
year in which used. Because management does not anticipate that this will
occur, no such income taxes have been provided.
14. TRANSACTIONS WITH DIRECTORS AND TRUSTEES
The Company has had, and expects to have in the future, loans with its
directors, trustees, and executive officers. Such loans, in the opinion of
management do not include more than the normal
F-24
risk of collectibility or other unfavorable features. Following is a
summary of activity for such loans:
Years Ended
December 31,
-------------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Balance, beginning of year $ 3,589 $ 4,411 $ 3,694
New loans granted 414 642 754
Repayments of principal (356) (1,464) (37)
------- ------- -------
Balance, end of year $ 3,647 $ 3,589 $ 4,411
======= ======= =======
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as standby letters of credit and
commitments to extend credit with off-balance-sheet risk that are not
reflected in the financial statements. Financial instruments with
off-balance-sheet risk involve elements of credit, interest rate,
liquidity and market risk.
Management does not anticipate any significant losses as a result of these
transactions. The following summarizes these financial instruments and
other commitments and contingent liabilities at their contract amounts:
June 30, 2001 December 31,
(unaudited)2001 2000 1999
----------- ---- ----
(In Thousands)
Commitments to extend credit:
Unused lines of credit $42,058 $39,611 $31,269
Mortgage commitments 18,393 22,654 12,937
Existing loan agreements 7,473 7,658 5,515
Standby letters of credit 1,457 1,457 1,022
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some commitments may be
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
Standby letters of credit are written conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
F-25
In the ordinary course of business, the Company is party to various legal
proceedings, none of which, in the opinion of management, will have a
material effect on the Company's consolidated financial position or results
of operations.
The Company leases facilities and certain equipment under cancelable and
noncancelable leases expiring in various years through the year 2007.
Certain of the leases provide for renewal periods for up to fifteen years
at the discretion of the Company. Rent expense under operating leases was
$165,620, $135,447, and $127,624, for the years ended December 31, 2000,
1999, and 1998, respectively.
Aggregate future minimum rental payments under the terms of the operating
leases at December 31, 2000, are as follows:
(In Thousands)
2001 $ 173
2002 168
2003 149
2004 84
2005 88
Thereafter 96
-----
$ 758
=====
16. CONCENTRATIONS OF CREDIT RISK
Most of the Company's loans consist of residential and commercial real
estate loans located in Western Massachusetts. As of June 30, 2001,
December 31, 2000 and 1999, the Company's residential and commercial
related real estate loans represented 73%, 76% and 75% of total loans,
respectively. The Company's policy for collateral requires that the amount
of the loan may not exceed 95% and 80% of the appraised value of the
property for residential and commercial real estate, respectively; at the
date the loan is granted. For residential loans, in cases where the loan
exceeds the percentage, private mortgage insurance is typically obtained
for that portion of the loan in excess of 80% of the appraised value of the
property.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
Methods and assumptions for valuing the Company's financial instruments are
set forth below for financial instruments that have fair values different
than their carrying values. Fair values are calculated based on the value
without regard to any premium or discount that may result from
concentrations of ownership of a financial instrument, possible tax
ramifications or estimated transaction costs.
Cash and Cash Equivalents and Accrued Interest and Dividends - The carrying
amounts of these items are considered to be a reasonable estimate of fair
value due to their short-term nature.
Securities and Mortgage Backed Securities - The estimated fair values for
securities and mortgage backed securities, except certain state and
municipal securities, are based on quoted market prices or dealer
quotations. The fair value of certain state and municipal securities, not
readily available through market sources other than dealer quotations, are
based on quoted market prices of similar instruments, adjusted for
differences between the quoted instruments and the instruments being
valued.
F-26
Federal Home Loan Bank and Other Stock - These investments are carried at
cost which approximates fair value.
Loans - Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, net of the
applicable portion of the allowance for loan losses, such as commercial and
industrial, commercial real estate, residential mortgage, and consumer.
Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming categories.
The fair value of performing loans, except residential mortgage loans, is
calculated by discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan. The estimate of maturity is based
on the Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic and lending conditions. For performing residential
mortgage loans, fair value is estimated by discounting contractual cash
flows adjusted for prepayment estimates using discount rates based on
secondary market sources adjusted to reflect differences in servicing and
credit costs.
Fair value for impaired loans is based on recent external appraisals if the
loan is collateral dependent. Assumptions regarding credit risk cash flows
and discount rates are judgmentally determined using available market
information and specific borrower information.
Management has made estimates of fair value discount rates that it believes
to be reasonable.
Deposits - The fair value of deposits with no stated maturity, such as
noninterest-bearing demands deposits, savings and NOW accounts, and money
market and checking accounts, is equal to the amount payable on demand. The
fair value of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
Customer Repurchase Agreements and Federal Home Loan Bank Advances - The
fair value of these agreements and advances is based on the discounted
value of contractual cash flows. The discount rate is estimated using the
rates currently offered.
Commitments to Extend Credit - The stated value of commitments to extend
credit approximates fair value as the current interest rates for similar
commitments do not differ significantly. For fixed-rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates. Such differences are not considered
significant.
F-27
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
2000 1999
------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------------------- --------------------------
(In Thousands)
ASSETS:
Cash and cash equivalents $ 32,729 $ 32,729 $ 25,493 $ 25,493
Securities:
Available for sale 75,709 75,709 53,164 53,164
Held to maturity 39,461 39,739 44,239 43,897
Mortgage backed securities:
Available for sale 52,580 52,580 23,568 23,568
Held to maturity 6,806 6,864 4,507 4,425
Federal Home Loan Bank and
other stock 3,446 3,446 3,356 3,356
Loans - net 464,531 465,435 467,444 459,869
Accrued interest and dividends 4,172 4,172 3,607 3,607
LIABILITIES:
Deposits 601,896 604,523 551,024 551,496
Customer repurchase agreements 7,686 7,686 3,274 3,273
Federal Home Loan Bank advances - - 5,000 4,999
Limitations - Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Where quoted market prices
are not available, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment. Changes in assumptions could significantly affect the
estimates.
18. SEGMENT INFORMATION
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the
others. For example, commercial lending is dependent upon the ability of
the Bank to fund itself with retail deposits and other borrowings and to
manage interest rate and credit risk. This situation is also similar for
consumer and residential mortgage lending. Accordingly, all significant
operating decisions are based upon analysis of the Company as one operating
segment or unit.
The Company operates only in the U.S. domestic market, primarily in Western
Massachusetts. For the six months ended June 30, 2001 and 2000 and the
years ended December 31, 2000, 1999 and 1998, there is no customer that
accounted for more than 10% of the Company's revenue.
F-28
19. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The balance sheets of the Company are as follows:
June 30, 2001 December 31,
(unaudited)2001 2000 1999
------------- -------------------
(In Thousands)
ASSETS:
Cash and due from banks $ 2,114 $ 671 $ 137
Securities:
Available for sale - at estimated fair value 20,738 26,369 24,887
Held to maturity - at amortized cost 4,575 4,472 3,992
Mortage backed securities:
Available for sale - at estimated fair value 699 1,120 1,775
Held to maturity - at amortized cost 5,730 -- --
Investment in subsidiary 46,935 44,704 39,873
Other assets 566 616 686
------- ------- -------
TOTAL ASSETS $81,357 $77,952 $71,350
======= ======= =======
LIABILITIES AND EQUITY:
Other liabilities $ 503 $ 197 $ 105
Equity 80,854 77,755 71,245
------- ------- -------
TOTAL LIABILITIES AND EQUITY $81,357 $77,952 $71,350
======= ======= =======
F-29
The statements of income for the Company are as follows:
Six Months Years Ended
Ended June 30, December 31,
------------------ -------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
(unaudited)
(In Thousands)
INTEREST AND DIVIDEND INCOME
Interest on securities $ 1,012 $ 977 $ 1,998 $ 1,870 $ 1,757
Other 28 2 2 (4) --
------- ------- ------- ------- -------
Total interest and dividend income 1,040 979 2,000 1,866 1,757
------- ------- ------- ------- -------
NONINTEREST EXPENSES 33 27 60 52 44
------- ------- ------- ------- -------
Income before provision for income taxes
and equity in undistributed net income
of subsidiary 1,007 952 1,940 1,814 1,713
------- ------- ------- ------- -------
PROVISION FOR INCOME TAX 363 344 703 638 601
------- ------- ------- ------- -------
Income before equity in undistributed
net income of subsidiary 644 608 1,237 1,176 1,112
UNDISTRIBUTED INCOME
OF SUBSIDIARIES 1,728 2,698 4,843 4,351 4,000
------- ------- ------- ------- -------
NET INCOME $ 2,372 $ 3,306 $ 6,080 $ 5,527 $ 5,112
======= ======= ======= ======= =======
F-30
The statements of cash flows of the Company are as follows:
Six Months Years Ended
Ended June 30, December 31,
------------------- -------------------------------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
(unaudited)
(In Thousands)
OPERATING ACTIVITIES:
Net income $ 2,372 $ 3,306 $ 6,080 $ 5,527 $ 5,112
Net amortization of premiums on securities
and mortgage backed securities (1) 2 (4) 7 19
Net realized securities gains (28) (1) (1) - -
Equity in undistributed earnings of subsidary (1,728) (2,698) (4,843) (4,351) (4,000)
Changes in assets and liabilities
Other assets 50 (7) (17) 1,785 138
Other liabilities 186 3 80 100 2,007
------- ------- ------- ------- -------
Net cash provided by operating activities 851 605 1,295 3,068 3,276
------- ------- ------- ------- -------
INVESTING ACTIVITIES:
Securities, held to maturity
Purchases (2,104) (975) (975) (3,491) (3,762)
Proceeds from maturities and principal collections 2,001 500 500 2,759 3,251
Securities, available for sale
Purchases - (3,913) (3,402) (9,446) (7,095)
Proceeds from sales - 1,997 999 - -
Proceeds from maturities and principal collections 5,998 1,500 1,500 3,000 6,000
Mortgage backed securities, held to maturity
Purchases (5,882) - - - -
Proceeds from maturities and principal collections 150 - - 40 315
Mortgage backed securities, available for sale
Purchases - - - (1,014) -
Proceeds from maturities and principal collections 429 244 617 1,237 985
------- ------- ------- ------- -------
Net cash provided by (used in) investing activities 592 (647) (761) (6,915) (306)
------- ------- ------- ------- -------
NET INCREASE/(DECREASE) IN CASH 1,443 (42) 534 (3,847) 2,970
CASH BEGINNING YEAR 671 137 137 3,984 1,014
------- ------- ------- ------- -------
CASH END OF YEAR $ 2,114 $ 95 $ 671 $ 137 $ 3,984
======= ======= ======= ======= =======
F-31
20. OTHER NONINTEREST EXPENSE
Indirect auto lending processing charges, as a component of other
noninterest expense, exceed 1% of the aggregate of total interest income
and noninterest income, and are not shown separately on the consolidated
statements of income. Indirect auto lending processing charges of
approximately $458,000, $379,000, $746,000, $1,005,000 and $515,000 were
recorded during the six months ended June 30, 2001 and 2000 and for the
years ended December 31, 2000, 1999 and 1998, respectively.
21. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2001
-----------------------------------
First Quarter Second Quarter
--------------- -----------------
(In Thousands)
Interest and dividend income $12,260 $12,016
Interest expense 6,842 6,582
------- -------
Net interest and dividend income 5,418 5,434
------- -------
Provision for loan losses 328 272
Noninterest income 385 455
Noninterest expense 3,563 3,935
------- -------
Income before income taxes 1,912 1,682
Income taxes 650 572
------- -------
Net income $ 1,262 $ 1,110
======= =======
F-32
2000
----------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(In Thousands)
Interest and dividend income $11,014 $11,530 $11,922 $12,253
Interest expense 5,568 5,887 6,337 6,743
------- ------- ------- -------
Net interest and dividend income 5,446 5,643 5,585 5,510
------- ------- ------- -------
Provision for loan losses 525 225 150 189
Noninterest income 851 473 395 1,136
Noninterest expense 3,258 3,354 3,847 4,226
------- ------- ------- -------
Income before income taxes 2,514 2,537 1,983 2,231
Income taxes 870 877 677 761
------- ------- ------- -------
Net income $ 1,644 $ 1,660 $ 1,306 $ 1,470
======= ======= ======= =======
1999
----------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(In Thousands)
Interest and dividend income $10,012 $10,195 $10,611 $11,030
Interest expense 4,997 5,122 5,459 5,573
------- ------- ------- -------
Net interest income 5,015 5,073 5,152 5,457
------- ------- ------- -------
Provision for loan losses 300 200 100 243
Noninterest income 305 240 300 712
Noninterest expense 3,025 3,025 3,299 3,637
------- ------- ------- -------
Income before income taxes 1,995 2,088 2,053 2,289
Income taxes 658 715 697 828
------- ------- ------- -------
Net income $ 1,337 $ 1,373 $ 1,356 $ 1,461
======= ======= ======= =======
22. SUBSEQUENT EVENTS (UNAUDITED)
Plan of Reorganization and Stock Offering - On June 17,19, 2001, the Board
of Trustees of the Company and the Board of Directors of Westfield Bank
approved a plan of reorganization (the "Plan") whereby the Company will
form a mid-tier stock holding company ("Westfield Financial, Inc.") and
exchange 100% of the common stock of the Bank for a majority interest in
Westfield Financial, Inc. Pursuant to the Plan, shares of Westfield
Financial, Inc. are expected to be offered
F-33
initially for subscription by depositors with eligible accounts at the Bank
as of specified dates and if available, the tax qualified employee benefit
plans of Westfield Bank, which will provide retirement benefits to the
Company's employees. The common stock will be offered at $10.00 per share.
The Company will offer between 3,196,000 and 4,324,000 shares. At least the
minimum number of shares offered in the reorganization must be sold. Any
stock not purchased in the subscription offering will be sold in a
community offering to be commenced simultaneously with the subscription
offering.
The Plan provides that when the reorganization is complete, a "Liquidation
Account" will be established in an amount equal to the net worth of the
Company set forth in its latest statement of financial condition. The
function of the Liquidation Account is to establish a priority on
liquidation to the assets of the Company to Eligible Account Holders (as
defined in the Plan) who continue to maintain deposits in the Bank after
the reorganization. In the unlikely event of a complete liquidation of the
Company, and only in such event, each Eligible Account Holder would receive
from the Liquidation Account a liquidation distribution based on the their
proportionate share of the then remaining qualifying deposits.
Current regulations allow the Bank to pay dividends on its stock after the
reorganization if its regulatory capital would not thereby be reduced below
the amount then required for the aforementioned Liquidation Account. Also,
capital distribution regulations limit the Bank's ability to make capital
distributions which include dividends, stock redemptions and repurchases
and other transactions charged to the capital accounts based on their
capital level and supervisory condition. Federal regulations also limit any
repurchase of the stock for the Bank of its holding company for three years
after reorganization except for repurchases pursuant to an open-market
stock repurchase program with certain regulatory criteria and approval of
the FDIC.
Reorganization costs will be deferred and reduce the proceeds from the
shares sold in the reorganization. If the reorganization is not completed,
all costs will be charged as an expense. As of August 24, 2001,
reorganization costs of approximately $300,000 had been incurred.
Employee Stock Ownership Plan - In connection with the Plan, Westfield
Financial, Inc. intends to establish an Employee Stock Ownership Plan
("ESOP")for eligible employees. Employees employed with the Company,
Westfield Financial, Inc. or the Bank who have completed one year of
service and have attained age 21 are eligible to participate.
To fund the purchase of 8% of the shares of common stock issued in the
reorganization, the ESOP Trust will borrow funds from the Company. The loan
to the ESOP Trust will be repaid principally from the Bank's contributions
to the ESOP Trust over a period of 10 years and the collateral for the loan
will be the common stock purchased by the ESOP Trust.
Shares purchased by the ESOP will be held by a trustee for allocations
among participants as the loan is repaid.
F-34
--------------------------------------------------------------------------------
You should rely only on the information contained in this document or
that to which we have referred you. We have not authorized anyone to provide you
with information that is different. This document does not constitute an offer
to sell, or the solicitation of an offer to buy, any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation
would be unlawful. The affairs of Westfield Bank or Westfield Financial may
change after the date of this prospectus. Delivery of this document and the
sales of shares made hereunder does not mean otherwise.
Westfield Financial, Inc.
(Proposed Stock Holding Company for Westfield Bank)
Up to 4,972,600 Shares of Common Stock
Prospectus
Keefe, Bruyette & Woods, Inc.
_____________, 2001
Until the later of _________, 2002 or 25 days after commencement of the
stock offering, all dealers effecting transactions in these securities, whether
or not participating in this stock offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.(1)
Massachusetts Commissioner of Banks registration fee(2) ......... $ 5,000
SEC registration fee(2) ......................................... 12,432
AMEX Listing Fee(2) ............................................. 33,500
NASD Filing Fee ................................................. $ 5,473
Printing, postage and mailing ................................... 200,000
Legal fees and expenses ......................................... 350,000
Accounting fees and expenses .................................... 125,000
Appraiser's fees and expenses (including business plan) ......... 72,500
Marketing fees, selling commissions, and
underwriter's expenses (including counsel fees) (3) ............ 500,000
Conversion agent fees and expenses .............................. 50,000
Certificate printing ............................................ 10,000
Blue Sky fees and expenses (including fees of counsel) .......... 20,000
Miscellaneous ................................................... 19,750
TOTAL ........................................................... $1,403,655
==========
________________
(1) All expenses are estimated except where otherwise indicated.
(2) Based upon the issuance of 4,972,000 shares at $10.00 per share.
(3) Assumes 1.5% commission paid and excludes Employee Stock Ownership Plan
shares and shares purchased by corporators, trustees, directors, officers and
employees of Westfield Mutual Holding Company and Westfield Bank.
Item 14. Indemnification of Directors and Officers.
Section 67 of the Massachusetts Business Corporation Law ("MBCL") sets
forth certain circumstances under which directors, officers, employees and
agents may be indemnified against liability which they may incur in their
capacity as such. Section 67 of the MBCL provides as follows:
"Indemnification of Directors, Officers, Employees,
etc."--Indemnification of directors, officers, employee and other
agents of a corporation and persons who serve at its request as
directors, officers, employees or other agents of another organization
or who serve at its request in any capacity with respect to any
employee benefit plan, may be provided by it to whatever extent shall
be specified in or authorized by (i) the articles of organization or
(ii) a by-law adopted by the stockholders or (iii) a vote adopted by
the holders of a majority of the shares of stock entitled to vote on
the election of directors. Except as the articles of organization or
by-laws otherwise require, indemnification of any persons referred to
in the preceding sentence who are not directors of the corporation may
be provided by it to the extent authorized by the directors. Such
indemnification may include payment by the corporation of expenses
incurred in defending a civil or criminal action or proceeding in
advance of the final disposition of such action or proceeding, upon
receipt of an undertaking by the person indemnified to repay such
payment if he shall be
adjudicated to be not entitled to indemnification under this section
which undertaking may be accepted without reference to the financial
ability of such person to make repayment. Any such indemnification may
be provided although the person to be indemnified is no longer an
officer, director, employee or agent of the corporation or of such
other organization or no longer serves with respect to any such
employee benefit plan.
No indemnification shall be provided for any person with respect to any
matter as to which he shall have been adjudicated in any proceeding not
to have acted in good faith in the reasonable belief that his action
was in the best interest of the corporation or to the extent that such
matter relates to service with respect to an employee benefit plan, in
the best interests of the participants or beneficiaries of such
employee benefit plan.
The absence of any express provision for indemnification shall not
limit any right of indemnification existing independently of this
section.
A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or
other agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or other agent of
another organization or with respect to any employee benefit plan
against any liability incurred by him in any such capacity, or arising
out of his status as such, whether or not the corporation would have
the power to indemnify him against such liability.
The Company's Articles of Organization provide for the indemnification
of directors, officers, employees and other agents of the Company.
Under Article VI "Other Lawful Provisions," Section 6.7 entitled
"Indemnification" states the following policies and procedures of the
Company on indemnification:
The Company will indemnify and hold harmless, to the fullest extent
authorized by the Massachusetts Business Corporation Law, anyone
involved or threatened to be made a party in an action, suit or
proceeding by reason of his or her service for the Company or at the
request of the Company as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan;
against all expense, liability and loss, including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement, reasonably incurred or suffered by him or her in connection
with such action, suit or proceeding; provided, however that such
action, suit or proceeding was authorized by the Board of Directors of
the Company (except for proceedings to enforce rights to
indemnification).
The right to indemnification includes the advancement of expenses
incurred in defending any such action, suit or proceeding, for any
director or officer at the level of Vice President or above, and in the
discretion of the Board of Directors for any other officer or employee.
The Company may, to the extent authorized by the Board of Directors,
grant rights to indemnification and the advancement of expenses to any
employee of agent of the
Company; the Company may also enter into specific agreements,
commitments or arrangements for indemnification on any terms not
prohibited by law which it deems to be appropriate.
The rights to indemnification and to the advancement of expenses shall
not be exclusive of any other right which any person may have or
hereafter acquire under any statute, the Company's Articles, Bylaws,
agreement, vote of stockholders or disinterested directors or
otherwise.
Item 15. Recent Sales of Unregistered Securities.
Not Applicable.
Item 16. Exhibits and Financial Statement Schedules.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits. (Filed herewith unless otherwise noted)
1.1 Engagement Letter dated June 15, 2001, between Westfield Bank and
Keefe, Bruyette & WoodsWoods*
1.2 Form of Agency Agreement, between Westfield Mutual Holding
Company and Keefe, Bruyette & Woods Woods**
2.1 Plan of Reorganization and Minority Stock Issuance of
Westfield Mutual Holding Company
3.1 Articles of Organization of Westfield Financial, Inc.
3.2 Bylaws of Westfield Financial, Inc.*
3.3 Amended and Restated Charter of Westfield Mutual Holding CompanyCompany*
3.4 Amended and Restated Bylaws of Westfield Mutual Holding CompanyCompany*
4.1 Articles of Organization of Westfield Financial, Inc.
(See Exhibit 3.1)
4.2 Bylaws of Westfield Financial, Inc. (See Exhibit 3.2)*
4.3 Form of Stock Certificate of Westfield Financial, Inc.*
5.1 Form of Opinion of Thacher Proffitt & Wood regarding legality of
securities to be registeredregistered*
8.1 Form of Opinion of Thacher Proffitt & Wood regarding federal tax
matters*matters
8.2 Form of Opinion of Deloitte & Touche LLP regarding state and
local tax matters**
8.3 Letter from RP Financial, LC. regarding subscription rightsrights*
10.1 Form of Employee Stock Ownership Plan of Westfield Financial,
Inc.*
10.2 Form of the Benefit Restoration Plan of Westfield Financial,
Inc.*
10.3 Form of Employment Agreement, between Donald A. Williams and
Westfield Financial, Inc.*
10.4 Form of Employment Agreement, between Victor J. Carra and
Westfield Financial, Inc.*
10.5 Form of Employment Agreement, between Michael J. Janosco, Jr.
and Westfield Financial, Inc.*
10.6 Form of One Year Change in Control Agreement by and among
certain officers and Westfield Financial, Inc. and
Westfield BankBank*
10.7 Form of Directors' Deferred Compensation PlanPlan*
21.1 Subsidiaries of the RegistrantRegistrant*
23.1 Consent of Thacher Proffitt & Wood (included in Exhibits 5.1
and 8.1 to this Registration Statement)
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of RP Financial, LC.*
24.1 Powers of Attorney (included in Signature Page of this
Registration Statement)*
99.1 Appraisal Report of RP Financial, LC. (filed in paper format
only)*
99.2 Form of marketing materials to be used in connection with the
offeringoffering*
_____
*To*Previously filed with the initial filing of the Registration Statement
on Form S-1 on August 28, 2001.
** To be filed by amendment.
(b) Financial Statement Schedules.
All schedules have been omitted as not applicable or not required under
the rules of Regulation S-X.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
To file, during any period in which offers or sales are
being made, a post-effective amendment to this
Registration Statement:
To include any Prospectus required by Section 10
(a)(3) of the Securities Act of 1933;
To reflect in the Prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the
effective Registration Statement;
To include any material information with
respect to the plan of distribution not
previously disclosed in the Registration
Statement or any material change to such
information in the Registration Statement;
That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the Offering.
The undersigned Registrant hereby undertakes to furnish stock
certificates to or in accordance with the instructions of the respective
purchasers of the Common Stock, so as to make delivery to each purchaser
promptly following the closing under the Plan of Reorganization and Minority
Stock Issuance.
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Westfield,
Commonwealth of Massachusetts on August 27,October 11, 2001.
Westfield Financial, Inc.
/s/ Donald A. Williams
__________________________________________
By: Donald A. Williams
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Donald A. Williams, as their true and
lawful attorney-in-fact in any and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities to sign the Form S-1 Registration Statement and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the U.S. Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or either one of his or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
and any rules and regulations promulgated thereunder, this Registration
Statement, has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
---- ----- ----
/s/ Donald A. Williams August 27* October 11
_____________________________ President, Chief Executive __________, 2001
Donald A. Williams Officer and Director
/s/ Victor J. Carra August 27* October 11
_____________________________ Executive Vice President and __________, 2001
Victor J. Carra Director
/s/ Michael J. Janosco, Jr. August 27* October 11
_____________________________ Chief Financial Officer and __________, 2001
Michael J. Janosco, Jr. Treasurer
Name Title Date
---- -----
/s/ David C. Colton, Jr. August 27* October 11
______________________________ Director __________, 2001
David C. Colton, Jr.
/s/ Robert T. Crowley, Jr. August 27* October 11
______________________________ Director ___________, 2001
Robert T. Crowley, Jr.
/s/ Thomas J. Howard August 27* October 11
______________________________ Director ___________, 2001
Thomas J. Howard
/s/ Harry C. Lane August 27* October 11
______________________________ Director ___________, 2001
Harry C. Lane
/s/ William H. McClure August 27* October 11
______________________________ Director ___________, 2001
William H. McClure
/s/ Mary C. O'Neil August 27* October 11
______________________________ Director ___________, 2001
Mary C. O'Neil
/s/ Richard C. Placek August 27* October 11
______________________________ Director ___________, 2001
Richard C. Placek
______________________________ Director ___________, 2001
Paul R. Pohl
/s/ Charles E. Sullivan August 27* October 11
______________________________ Director ___________, 2001
Charles E. Sullivan
/s/ Thomas C. Sullivan August 27* October 11
______________________________ Director ___________, 2001
Thomas C. Sullivan
* /s/ Donald A. Williams as
attorney-in-fact by power of attorney
dated August 11, 2001, as filed on
August 28, 2001.